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Calculating Labor Burden and Profits – Introduction: An Example

Labor Burden: If you’re struggling to understand and measure your Labor Burden and its effect on profit, these articles by Diane Gilson will teach you how to do it. We’ll start with some quick definitions of labor burden and how to calculate it, followed by a real-life example so you can see how it’s done.

Payroll Burden equals employee cost in additionto gross payrollWhat Is Labor Burden?

Labor burden, sometimes called payroll burden, is the total amount you pay your employees, including their pay, benefits, taxes, paid time off, bonuses, and any costs you can directly attribute to that employee. 

Why is Labor Burden Important? 

Companies that consider only their employees’ pay in decisions, bids, and costing are only looking at a small fraction of the real costs of those employees, which will inevitably result in lower profit.

Plus, since each employee’s burden is different, knowing the amount of burden for each person in your company allows you to make more informed choices as you assign personnel to each task, again resulting in higher profit margins.

How to Calculate Labor Burden Rate and Fully-burdened Cost

Calculating the burden rate for an individual employee involves two steps: (Note, this rate should be calculated for each employee in your company. Click here to get a simple, fill-in-the-blank labor burden rate calculator to make this easy for you.)

1. Start with the employee’s gross pay

Gross pay is the amount you pay before any deductions for taxes, benefits, etc. For hourly employees, it is the number of hours they work per year multiplied by their hourly rate before deductions.

2. Calculate other costs attributable to that employee

Here you’re adding up all of the costs for keeping that employee working, including elements like:

    • Include all employee-related costs when you compute fully-burdened labor ratePayroll taxes 
    • Workers’ compensation insurance
    • Health insurance
    • Retirement benefits
    • Cell, telephone, and/or Internet costs
    • Uniforms 
    • Company vehicle usage (depreciation, gas and oil, maintenance, license, insurance, etc.)
    • Office equipment usage and maintenance and office space
    • Small tools and equipment usage
    • Office supplies
    • Estimated annual bonus
    • Employer-paid snacks, meals, parties, entertainment
    • Training fees, seminars
    • Etc.

Note: the more complete this list, the more accurate your calculations will be.

3. Calculate the employee’s fully-burdened cost

Adding the results of items 1 and 2 will give you that employee’s fully-burdened cost:  gross pay + all additional costs. (See the example below.)

But the annual labor burden cost alone is not enough. To truly understand their real costs, you need to convert the labor burden into a Labor Burden Cost Per Production Hour.

How To Calculate Labor Burden Rate Per Production Hour

Your labor burden rate is calculated by dividing an employee’s labor burden by the number of hours they are available for work.

1. Calculate the number of hours that the employee is available for work

Calculate the number of available hours:

    • Start with the number of hours they work a year, assuming 52 weeks per year
    • Subtract the number of hours they won’t be available to work due to
      • Vacation days
      • Paid holidays
      • Sick, family leave, and personal days
      • Days spent in training
      • Hours they will spend in administrative meetings and other general administrative tasks throughout the year.

The result will be the total number of hours that the employee is available for work.

2. Divide the fully-burdened cost by the number of hours the employee is available for work to calculate their Labor Burden Cost Per Production Hour

The first time you do this, you’ll probably be amazed to see that the person you thought was costing you $20 per hour is actually costing you far more. That’s why this process is so valuable and essential for running a profitable company.

This is all probably about as clear as mud, so let’s make it real by giving you an example…

Access a labor burden calculator by clicking hereLabor Burden & Profits – An Example

What do your employees really cost? Let’s look at an example…

Step 1: Determine the employee’s base pay

We’ll start with an employee (“Pat”) whose hourly compensation is $17, or $35,360 gross annual payroll. As Pat’s employer, you do your research and find out that Pat has a variety of additional annualized costs “attached” to this position.

Step 2: Calculate other costs related to (required for) that employee

Pat’s additional costs:

  • Calculating the effect of employee costs on profits$3,005 for payroll taxes (based on 2.7% state unemployment on the first $9,000 and no other state disability taxes)
  • $3,536 for workers’ compensation insurance (at $10 per $100)
  • $4,200 for health insurance ($350 per month)
  • $1,060 for retirement benefits (3% of compensation)
  • $720 for cell, telephone, and/or Internet costs ($60 per month)
  • $150 in uniforms (e.g., 4 company shirts at $25, 1 jacket at $50) or for office workers an equivalent amount in coffee(!)
  • $6,000 in company vehicle usage (depreciation, gas, oil, maintenance, license, insurance, etc.), or for office workers, an equivalent amount in equipment usage and maintenance. and office space
  • $300 in small tools and equipment usage (at $25 per month) or for office workers, an equivalent amount in office supplies
  • $708 estimated annual bonus (2% of wages)
  • $100 employer-paid snacks, meals, parties, entertainment
  • $250 in training fees, seminars, etc…

Step 3. Compute the total to see Pat’s additional Labor Burden Cost

The total of all these additional costs equals Pat’s Labor Buden Cost =  $20,029

Step 4. Calculate Pat’s Fully-burdened Annual Cost

  • Pat’s annual Base Pay: $35,360 +
  • Pat’s annual Labor Buden (additional costs): $20,029
  • Pat’s annual Fully-burdened Cost = $55,389

Now, Let’s Calculate Pat’s Labor Burden Cost Per Production Hour

How many hours is Pat actually available for work?

Pat is potentially available for 2,080 hours of company work (52 weeks/year x 40 hours/week).

Subtract Pat’s non-project paid time for the year: 

    • 6 holidays
    • 10 vacation days
    • 6 sick or personal days
    • 2 days of training seminars

This equals 24 days (192 hours), leaving 1,888 available working hours.

Pat’s daily breaks are assigned to jobs or projects, but we need to subtract an estimated 2 hours per week from the 47 remaining work weeks for miscellaneous administrative meetings, timekeeping, general problem-solving or prep time, and so on. This reduces the available production time by another 94 hours.

Total time available for production/project work: 1,794 hours

Pat’s Labor Burden Cost, Fully-burdened Cost and Labor Burden Cost Per Production Hour

First, Pat’s additional Labor Burden Costs total just over $20,000. This brings Pat’s annual cost to $55,389.

Therefore Labor Burden Cost per Production Hour (or Fully-burdened Cost) to your company is $30.87 per production/project hour ($55,389 ÷ 1,794 hours) or $0.51 per minute.

To compute Pat’s Labor Burden Rate (%) per Production (work) hour, subtract Pat’s hourly rate from their fully burdened cost ($30.87 – $17.00 = $13.87) and divide the excess by the base hourly rate.

We see that our additional cost to have Pat “on the job”, when computed as a percentage, adds 82% to Pat’s base hourly rate.

The bottom line:
Pat is a truly costly and valuable asset whose time should be carefully assigned.
And their related costs (and resulting contribution) should be closely measured and monitored to understand Labor Burden!

Labor Burden Calculator

As you can see, calculating labor burden costs, fully-burdened costs, and labor burden costs per production hour is essential.

And if you had a pre-built labor burden cost calculator, you could make the process significantly easier.

Great news – I’ve created an Excel-based, simple calculator you can get by clicking the button below…

“Fully-Burdened Labor Cost”
I.e., what it costs an employer for an employee to produce work for a specific period of time…

(…usually shown as a “per-hour” rate.) 

Labor Burden is an essential element of Job Costs

Click the image above to learn more about our Excel-based tool that will help you learn everything you need to know about your employee costs and billing rates…

Related Articles: Improving Accuracy By Using Fully-Burdened Costs In Bids | Knowing Your Fully-burdened Costs | Assigning Labor Burden Costs To Each Job

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