Labor Burden: The Real Cost of an Employee
Why this matters
The number on a technician's pay stub is not what that technician costs you. Not even close. Every working hour carries a stack of additional costs - taxes, insurance, benefits, paid time off - that the wage alone never shows. Owners who price off the raw wage underprice every job and wonder where the profit went. Labor burden is the difference between the wage and the real cost, and getting it right is the foundation of honest pricing and job costing.
What labor burden is
Labor burden is everything you spend to employ someone beyond their base wage, expressed on top of that wage. Add the wage and the burden together and you get the fully burdened labor cost - the true hourly cost of putting that person on a job.
It is usually stated as a percentage. If a tech's burden adds a meaningful fraction on top of base wage, their real cost per hour is well above what they take home. Skipping this is the most common reason a "profitable" job actually lost money.
What goes into the burden
The stack varies by shop, but these are the standard components:
- Employer payroll taxes: the employer's share of Social Security and Medicare, plus federal and state unemployment taxes. Mandatory, on every dollar of wage.
- Workers' compensation insurance: often a significant cost in the trades, priced by job-class risk. Roof and electrical classes cost more than office classes.
- General liability attributable to having field staff.
- Health insurance and other benefits you contribute toward.
- Retirement contributions if you match.
- Paid time off: vacation, holidays, sick days. You pay the wage; you get no billable hour back. This is pure burden.
- Training, certifications, licenses you fund.
- Uniforms, phone, tools, and small equipment provided to the employee.
Some shops also load vehicle cost and non-billable shop time into burden; others keep those separate. The key is to pick a consistent method and apply it the same way every time.
Wage versus billable rate versus burdened cost
Three numbers get confused constantly. Keep them straight:
- Wage: what the employee earns per hour. What they see.
- Fully burdened cost: wage plus burden. What you spend per hour to employ them. The number for job costing.
- Billable rate: what you charge the customer per labor hour. This must sit above the burdened cost by enough to cover overhead and leave profit.
The deadly mistake is setting the billable rate as a markup over the wage instead of over the burdened cost. Do that and your margin is a mirage - the burden quietly eats it on every hour billed.
The productive-hour problem
Burden gets worse when you account for non-billable time. An employee is paid for a full work year, but a real chunk of those paid hours never reach a customer's invoice - drive time, shop time, waiting on parts, paid time off, training, slow days. So the cost of employing them spreads across fewer billable hours than you pay for.
The honest way to compute your true cost per billable hour: take total annual cost (wage plus all burden) and divide by the hours you can actually bill, not the hours you pay. That divisor is smaller, so the real cost per billable hour climbs higher than burden alone suggests. Shops that ignore this underprice badly, because they spread cost across paid hours instead of billable ones.
How to calculate your burden rate
- Total the annual cost of an employee: base wage for the year plus every burden component listed above.
- Divide by the base wage to get the burden as a multiplier or percent on top of wage. This is your burden rate.
- Find billable hours per year: paid hours minus drive, shop, idle, paid time off, and training.
- Divide total annual cost by billable hours to get true cost per billable hour - the number to price against.
- Set the billable rate above that, with enough spread to cover overhead and target profit.
Run this per role, since a senior installer and an apprentice carry very different burdens and billable ratios.
Using burden in pricing and job costing
Every estimate and every costed job should use the burdened cost, never the wage. When you cost a finished job, multiply each person's burdened hourly cost by the hours they spent (including the non-billable time the job consumed) to get true labor cost. Price new work so the billable rate clears burden, overhead, and profit. Do this and your margins become real instead of optimistic. See related: Job Costing, Breakeven.
References
- IRS, employer payroll tax responsibilities (Circular E concepts)
- OSHA and state workers' compensation requirements for the trades
- U.S. Small Business Administration (SBA), the true cost of an employee
- See related: Job Costing, Gross Margin vs Net Margin, Breakeven