RHACOVA

Labor and overhead

How to Calculate Labor Burden in Construction

An employee's wage is the smallest part of what they cost you. Labor burden turns a wage into the real cost of an hour on the job.

The short answer

Labor burden is every employer cost of having someone on payroll beyond their wage. To calculate it, total the annual wage cost, add the burden costs on top, then divide the total by the hours that employee can actually bill — not by every hour you pay for. The result is your true cost per productive hour, and it is the number estimates should be built on.

Definitions

Labor burden
Payroll taxes, workers' compensation premiums, health and retirement benefits, and employer-paid costs tied to employing that person: tools, uniforms, training, licensing, phone.
Paid hours
Every hour you pay for in a year, including holidays, paid time off, training and shop time. A full-time schedule is often 2,080 paid hours.
Productive hours
The paid hours that can be billed to a job. Paid hours minus paid non-productive hours.
Loaded labor rate
Total annual labor cost divided by productive hours. This is a cost, not a price.

The formulas

Annual wage cost = hourly wage × paid hours per year

Annual burden cost = percentage costs (× annual wage) + flat yearly employer costs

Burden percentage = annual burden cost ÷ annual wage cost

Productive hours = paid hours − paid non-productive hours

Loaded cost per productive hour = (annual wage cost + annual burden cost) ÷ productive hours

Paid hours and productive hours are not the same

This is where most labor rates go wrong. You pay for 2,080 hours, but you cannot invoice the week of vacation, the holidays, the safety training or the morning spent loading the truck. If the full annual cost is divided by 2,080, the rate you estimate with is lower than the rate you actually incur — and the gap is invisible until the year closes.

The correction is to reduce the denominator, not to inflate the numerator. Paid time off is already paid for inside the annual wage cost; adding it again as a separate dollar amount double-counts it.

Worked example

An employee at $30/hour, with 10% payroll taxes, 8% workers' compensation, $6000 of benefits and $1200 of other employer-paid costs per year, over 2080 paid hours of which 160 cannot be billed:

  • Annual wage cost: $62,400.00
  • Annual burden cost: $18,432.00
  • Total annual labor cost: $80,832.00
  • Burden percentage: 29.54%
  • Cost per paid hour: $38.86
  • Cost per productive hour: $42.10

The wage was $30. The cost of an hour on the job is $42.10. Estimating at the wage would understate labor on every line of every quote.

These figures come from the same engine as the Labor Burden Calculator, so the example cannot drift away from the tool. They are illustrative inputs, not industry benchmarks — tax rates, comp classifications and benefit plans vary by state, trade and company.

What the loaded rate is, and is not

The loaded rate is a cost. It contains no overhead and no profit. Turning it into something you can charge takes two more steps: recovering overhead and then applying a margin, which is what the contractor hourly rate article builds step by step.

Common mistakes

  • Estimating from the wage, the single most expensive shortcut in contracting.
  • Dividing the annual cost by 2,080 hours instead of billable hours.
  • Adding PTO as a separate dollar cost on top of the annual wage cost.
  • Using one burden percentage for the whole crew. Workers' comp classes and benefits differ by role, and a foreman is not a laborer.
  • Charging the loaded rate to the customer and calling the difference profit.

Quick answers

What is included in labor burden?
Payroll taxes, workers' compensation premiums, health and retirement benefits, and employer-paid items tied to employing that person — tools, uniforms, training, licensing.
Should paid time off be added as a separate cost?
No. The wages for PTO are already inside the annual wage cost. Instead, subtract those hours from the hours the total cost is spread over.
Is labor burden a percentage or a dollar rate?
Both are useful. The percentage compares burden to wage; the dollar cost per productive hour is the number you estimate with.

Run the numbers

Total annual employer cost, burden percentage, cost per paid hour and cost per productive hour.

Open the Labor Burden Calculator

Free, no account, and the answer stays on the page.

Save your loaded labor rate once

Your Numbers stores your default loaded labor rate, so every new estimate starts from the real cost instead of a wage you half-remember.

Open Your Numbers

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

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