Stop Losing Money: Calculate Your True Cost of Construction Labor
- Cost Construction Accounting
- Oct 20
- 4 min read
In the highly competitive construction industry, bidding accurately is crucial for maintaining profitability. Many contractors win projects only to realize later that labor costs have wiped out their expected profits. The cause is simple but devastating: bidding based on gross wages instead of the True Cost of Labor.
If your estimates rely solely on wages, you’re underpricing each project by 20%–35%, a silent profit leak that worsens with every payroll run.
That hidden cost, known as the Labor Burden, includes employer payroll taxes, workers compensation, and employee benefits. Ignoring it leads to flawed job costing, distorted WIP reports, and incorrect overhead rates errors that misrepresent your true margins. This article will break down these costs and show you how specialized accounting systems can help you stop losing money on labor.
Table of Content:
Breaking Down the Hidden Cost: The True Cost Components
Most contractors track only wages, the amount employees see on their paychecks. However, the True Cost of Labor goes far beyond that number. Each hour of work carries mandatory and voluntary costs that must be factored into your bids.
1. Gross Wages
The base hourly pay or salary for employees performing direct project work. This is the visible portion most contractors already budget.
2. Employer Payroll Taxes
Includes Social Security and Medicare (FICA) at 7.65%, Federal Unemployment (FUTA), and State Unemployment (SUTA) up to the taxable wage limits. These are unavoidable costs that should be allocated to each job.
3. Workers’ Compensation Insurance
One of the largest hidden costs. Premiums vary by class code, trade, and Experience Modification Rate (EMR). For high-risk trades, this cost alone can add 10% or more to the real hourly rate.
4. Employee Benefits
Employer-paid benefits such as health insurance, paid time off (PTO), holidays, and retirement matching. Even modest benefit plans typically add another 10%–15% to total labor expenses.
Supervisors and office staff count as indirect labor and should remain in overhead. Only field labor directly tied to production belongs in your job cost labor burden.
The Financial Impact of Getting It Wrong
Failing to calculate the true cost of labor accurately doesn’t just distort your books, it damages every financial report that drives your business.
1. Job Costing Errors
If you record only gross wages under COGS, your profit per job appears inflated. Once payroll taxes, insurance, and benefits are paid, that “profit” disappears leaving you chasing cash flow instead of controlling it.
2. WIP Analytics Distortion
Underreported labor costs mean your percentage-of-completion calculations are wrong. You may recognize profit too early, which creates false confidence and inaccurate revenue forecasting.
3. Overhead Rate Misallocation
When contractors misclassify labor-related costs as general overhead, their overhead rate becomes skewed. That leads to bids that are too high (losing jobs) or too low (losing profit). Accurate labor burden allocation stabilizes your true overhead rate and pricing strategy.
Action Plan: How to Calculate Your True Labor Rate
Modern accounting software such as Sage 100 Contractor, Sage 300 CRE, or QuickBooks Online with Projects can automate these calculations when set up correctly. Here’s a practical framework you can apply right now.
Step 1: Collect Annual Cost Data
Gather totals for all employer payroll taxes, workers’ comp premiums, and benefit expenses for the year. Exclude employee contributions use only employer-paid amounts.
Step 2: Determine Productive Hours
Start with 2,080 paid hours per year per full-time employee and subtract PTO, holidays, training, and administrative time. The remainder is your productive hours, the actual hours generating project revenue.
Example: 2,080 total hours – 240 nonproductive hours = 1,840 productive hours.
Step 3: Compute the Hourly Burden Rate
Add that to the base wage to get the True Hourly Labor Cost:
Example Calculation
Component | Annual / Hourly | Notes |
Base wage | $30.00/hr | Journeyman carpenter |
Employer taxes | $2.30/hr | 7.65% FICA + SUTA/FUTA |
Workers’ Comp | $2.70/hr | Class code 5403 @ 9%, EMR 1.0 |
Benefits | $3.25/hr | Health, PTO, retirement |
True Cost / Hour | $38.25/hr | Actual cost to your business |
That 27% increase reflects the real cost per productive hour. Using this number ensures every bid covers labor fully and protects profit.
Aligning Labor Burden with Overhead and Job Costing
Direct labor burden (field workers) → Record in COGS tied to each job.
Indirect labor (supervisors, admin) → Record in Overhead.
Recalculate your overhead rate after burden is properly allocated, this will change your break-even markup and profit margin.
Review your WIP and Job Cost reports quarterly to ensure burden percentages stay accurate after workers’ comp audits or benefit changes.
Conclusion: Build Profit Into Every Hour You Pay
Calculating your True Cost of Labor is the fastest, most powerful step toward reliable profitability. When your bids reflect real costs, every project contributes the margin you expect, no surprises at year-end. If tracking and allocating these costs is pulling you off the job site, it’s time to get expert support.
Work With Construction Cost Accounting (CCA)
Construction Cost Accounting (CCA) specializes in providing accounting, bookkeeping, account payable, job costing, WIP analytics, sage accounting, quickbook and tax service exclusively for the construction industry. We help contractors optimize their financial systems so they can focus on growing their business without worrying about the details.
👉Take the next step toward better financial health. Book a free 30-minute consultation with us today to discuss how we can streamline your cost tracking and boost your bottom line.
Comments