Labor Pains: Calculating What People Really Cost
Whether you admire your admins or worship your workers—whatever salary they’re making—you’re paying much more.
As a general contractor or construction business owner, you could be shelling out as much as 50% more in employee costs. Remember that the next time you’re asked to do some precision job costing for a future project. If you don’t factor in this hidden-but-huge extra expense, you might as well guess the number of jellybeans in a big jar. Cause that’s what it is, guesstimating.
Many construction businesses blow their budget because they don’t correctly calculate the real cost of maintaining an employee.
There’s something you need to know about to be a better guesser. It’s called labor burden. Even the name implies a heavy load the boss has to carry whether they like it or not.
See there’s the standard cost of an employee which is their gross pay, or salary. Calculators for construction companies easily determine this. But then there are a whole bunch of additional costs or “perks” that take money to make you a more attractive employer.
When the budget for a job is established, it generally multiplies labor hours times the number of workers times the hourly pay. But unless you’re using something like a job costing app with a burden-rate calculator, your labor cost estimates will be way off and you’ll end up paying more than you’re receiving. A whole lot more.
That’s because behind the scenes, so to speak, you are automatically providing all of the perks and legal prerequisites that come with working for a fine upstanding company like yours. Things like unemployment benefits, insurance, paid time off, bonuses and a whole host of other amenities (tennis, anyone?).
Here’s a breakout in greater detail:
Employer Paid Taxes
Fica 7.65%
Federal unemployment 0.35%
State unemployment 2.90%
Employer-Paid Insurance and Matched Savings
Workers comp liability insurance 4.50%
401K contributions 2.00%
Employer Paid Benefits
Health and medical insurance
Fuel reimbursement
Meals and travel reimbursement
Training and classes
Yearly bonus
The formula for determining what workers really cost and improving job costing accuracy is something like this:
Gross Earnings
- Employer Paid Taxes
- Employer Paid Insurance
- Employer Paid Benefits
_______________________________
= Total Employee Actual Cost
Working or Shirking, They Still Get Paid
Employee-time-clock apps with a built-in burden calculator are definitely the best way to understand exactly what it costs to see a project through to completion. Clock in, clock out, tap-tap.
I confess, in a past life I would sit at my ergonomically-correct chair in my cozy cubicle and flip through magazines and catalogs. I called it “research.” Technically it was. Anything a writer reads is research, right? My boss didn’t see it that way. She saw it as chillin’ on company time and rolled her eyes. When you’re the owner billing by production hours, you may want to be a little more, shall we say, direct.
Production hours are those spent on the job actually producing goods or services. In other words, working. Non-productive hours are not billable but are still costly and essential to maintaining a professional environment and a committed workforce. You may think taking the family to Disneyland is hard work, but technically that’s considered non-productive hours.
It includes things like:
- Paid Vacation
- Paid Sick Leave
- Paid Holidays
- PTO
- 15-minute breaks
So, all this has to be considered to determine the total employee cost.
When you add everything up you have a number far higher than the hourly rate—something that approximates time and a half. For every dollar of employee wages, the employer must also pay a good deal more in additional burden costs. And that doesn’t include “overhead” costs, which are distributed over all employees based on actual work hours. Read more about poor construction job costing habits affecting your budget.
In summary, an employee’s pay rate and what you actually pay for that employee are not the same. You have to build in all the benefits that make working for your company desirable. It seems simple, but can easily blow your budget if you underbid and have to compensate. Most small businesses consult an accountant to calculate labor burden costs and identify their fully-burdened labor rate.
Hours worked on the job site are easily captured with a mobile time clock app. For a free demonstration, including our integrated labor burden calculator, visit busybusy.com
