Labor Burden: What Construction Contractors Need to Know to Price Jobs Correctly
- Cost Construction Accounting
- 6 days ago
- 6 min read
Picture this: You just completed a $150,000 commercial renovation. Your crew worked 800 hours, you came in on schedule, and the client is thrilled. But when you run your job costing report, the numbers tell a different story, your estimated profit of $22,500 (15%) has shrunk to just $4,800 (3.2%). What happened?
The culprit is often hiding in plain sight: inaccurate labor burden calculations. While you carefully tracked material costs and equipment rentals, your labor estimates were based on base wages alone. Those "hidden" costs payroll taxes, workers' comp, benefits, and non-billable time ate into your margins on every single labor hour. This is a cost accounting crisis that's killing your profitability.
For construction contractors, labor typically represents 40-60% of total project costs. Getting this number wrong doesn't just affect one line item, it cascades through your entire estimate, turning winning bids into losing projects. The solution lies in understanding labor burden and integrating it into your cost accounting system from estimate to final invoice.
What is Labor Burden in Construction Accounting?
Labor burden is the total cost of employing someone beyond their base hourly wage. In construction cost accounting, it's one of the most critical and most commonly miscalculated components of job costing.
Here's where contractors go wrong: You pay a carpenter $30 per hour and use "$30/hour × estimated hours" in your estimates. But your actual cost per billable hour might be $43 to $48 when you factor in payroll taxes, workers' compensation, benefits, and the reality that not every paid hour is billable to a job.
That $13-$18 gap multiplied across every labor hour on every project represents pure profit loss money that should be in your business account but isn't because your cost accounting system doesn't capture the full picture.
Labor burden breaks down into two categories essential for accurate job costing:
Mandatory costs include payroll taxes (FICA, FUTA, SUTA), workers' compensation insurance, and unemployment insurance. These are non-negotiable and must be tracked in your cost accounting system.
Optional costs include health insurance, retirement contributions, paid time off, training, tools, and equipment. While optional, they're real costs that affect your break-even point on every project.
Why Labor Burden is a Cost Accounting Issue
Many contractors treat labor burden as a payroll or HR concern. In reality, it's a fundamental cost accounting challenge that directly impacts three critical areas:
Job Costing Accuracy:Â If your cost accounting system doesn't apply the full labor burden to each job, your job cost reports will show inflated profits during the project and disappointing results at closeout. You'll think you're making 18% margins when you're actually making 8%.
Estimating Precision:Â Every estimate you build relies on accurate cost data. If you're estimating based on $30/hour labor when your true cost is $45/hour, every single bid is systematically underpriced. You'll win more work and lose money on every project.
Profitability Analysis:Â Without accurate labor burden in your cost accounting, you can't identify which types of projects, clients, or crews are actually profitable. You might think residential remodels are your bread and butter when they're actually draining cash because labor burden hits harder on smaller, labor-intensive jobs.
The contractors who thrive aren't just tracking hours, they're running integrated cost accounting systems that capture true labor costs and compare them against estimates in real-time.
Breaking Down Labor Burden for Job Costing
To build accurate job cost estimates and track actual performance, you need to understand every component of labor burden.
Mandatory Costs That Hit Every Job
Payroll Taxes (FICA):Â 7.65% of wages for Social Security and Medicare. On $100,000 in annual wages for a crew, that's $7,650 that must be allocated across your jobs through proper cost accounting.
Unemployment Taxes:Â FUTA is typically 0.6% after credits ($42 per employee), while SUTA varies by state from 1% to 10%+ depending on your claims history. A company with $500,000 in annual payroll might pay $5,000 to $50,000, a massive range that your cost accounting system must track accurately.
Workers' Compensation Insurance:Â This is often the largest labor burden component and the most variable. Rates range from 10% to 40%+ depending on trade classification and state. A roofing crew might face 35% workers' comp rates, while an interior finishing crew pays 12%. Your cost accounting system should apply different burden rates by crew or trade to maintain job costing accuracy.
For example: If you estimate a roofing project using a 20% overall labor burden when your actual roofing workers' comp rate is 35%, you've just underbid by 15% of your labor costs. On a $50,000 labor component, that's $7,500 in lost profit.
Optional Costs That Still Impact the Bottom Line
Health Insurance:Â At $600-$800 per month per covered employee, this adds $7,200-$9,600 annually. Your cost accounting should allocate this proportionally across billable projects.
Retirement Matching:Â A 4% 401(k) match on $50,000 in wages costs $2,000 annually money that must be recovered through accurate job pricing.
Paid Time Off:Â Two weeks vacation plus six holidays (136 hours) for a $30/hour employee costs $4,080 in wages paid but not billed to jobs. Proper cost accounting spreads this across billable hours.
Training, Tools, and Equipment:Â OSHA certifications, specialized tools, PPE, and uniforms add $1,000-$3,000 per employee annually. These costs belong in your labor burden calculation and your job costing system.
Common Cost Accounting Mistakes That Kill Profitability
Using Industry AveragesÂ
Industry publications might suggest 35-45% labor burden rates, but your actual rate depends on your specific workers' comp modifier, benefits package, and utilization rate. Using generic numbers means every estimate is wrong.
Not Updating AnnuallyÂ
Workers' comp rates change, insurance premiums increase, and wage scales adjust. Last year's burden rate applied to this year's estimates guarantees inaccuracy.
Ignoring Job-Specific Labor MixÂ
A project heavy on apprentice labor has different burden costs than one requiring all journeymen. Your estimating system should apply appropriate rates based on the actual crew composition.
Forgetting Burden on Change OrdersÂ
When you bill change order labor at $50/hour, is that covering your $45.64 true cost plus markup? Many contractors give away burden on changes because they're thinking about base wages, not true costs.
No Job Cost TrackingÂ
Without comparing estimated labor burden to actual labor burden on closed projects, you'll never know if your calculations are accurate. Your cost accounting system should generate variance reports showing estimated vs. actual for every cost component, including burden.
Integrating Labor Burden Into Your Cost Accounting System
Knowing your labor burden rate matters only if your cost accounting system uses it consistently from estimate through project closeout.
In Your Estimating Process
Build labor burden into every estimate as a separate line item or as part of your loaded labor rates. Your estimating software should:
Apply position-specific burden rates automatically
Update rates when you adjust base wages or burden components
Show both base wages and burdened labor costs for transparency
During Project Execution
Your job costing system should:
Track actual hours by position against estimated hours
Apply the correct burden rate to actual hours worked
Generate real-time cost reports showing labor costs with full burden
Alert you when actual labor (including burden) exceeds estimates
For example, if you estimated 120 hours at $45.64 ($5,477) but you're at 100 hours with 80% complete, you're tracking to 125 hours actual ($5,705). That $228 overrun might seem small, but spotting it early lets you course-correct before it becomes $2,000.
At Project Closeout
Your cost accounting system should generate reports showing:
Estimated labor hours vs. actual hours by position
Estimated labor burden vs. actual burden costs
Total labor cost variance and its impact on project profitability
Lessons learned to improve future estimates
This feedback loop is essential. If you consistently underestimate burden on exterior projects because weather delays reduce utilization, adjust your estimating burden rates for outdoor work.
For Strategic Decision-Making
With accurate labor burden in your cost accounting system, you can:
Analyze profitability by project type:Â Which types of projects deliver the best margins after accounting for full labor costs?
Evaluate crew performance:Â Which foremen or crews deliver the best productivity and utilization rates?
Make hiring decisions:Â Can you afford to add another employee, or should you subcontract overflow work?
Price competitively:Â Know your true costs so you can price aggressively where it makes sense and walk away from underpriced work.
Ready to Master Your Labor Costs?
Understanding labor burden is just the first step. Actually tracking it, applying it consistently, and using real-time data to make better decisions requires the right systems in place.
At Construction Cost Accounting (CCA), we help construction contractors like you implement cost accounting systems that:
Automatically calculate and apply accurate labor burden rates by employee type
Track actual costs against estimates in real-time for every job
Alert you when projects are trending over budget before it's too late
Generate profitability reports that reveal which jobs, clients, and crews perform best
Integrate seamlessly with your existing payroll and project management tools
Every job you price correctly generates the profit you need to grow your business, invest in your people, and build financial security. Every job you underprice because you ignored labor burden steals from your future.
Stop guessing. Start knowing. Contact CCA today to discover how proper construction cost accounting transforms you from a contractor who stays busy into a contractor who stays profitable.
