Labor cost is more than an employee’s hourly wage. A contractor may also pay employer taxes, workers’ compensation, benefits, paid nonproductive time and other employment-related expenses.
An estimate that includes only wage rates can understate the true project cost and reduce the expected profit. The calculation must also account for the number of productive hours required to complete the work.
This guide explains how small contractors can estimate labor hours, calculate a burdened labor rate and include labor cost correctly in a project estimate.
Distinguish Wage Rate From Labor Cost
The wage rate is the amount paid directly to the employee for each hour worked. The contractor’s actual labor cost may be higher because the business is responsible for additional employment expenses.
These may include:
- Employer payroll taxes
- Workers’ compensation insurance
- Unemployment insurance
- Health or retirement benefits
- Paid vacation, holidays and sick leave
- Bonuses and allowances
- Training and certification
- Other legally required or company-provided benefits
The combined cost is often called the burdened labor rate or fully loaded labor rate.
Requirements differ by location and employment arrangement. Use current payroll, insurance and benefit information rather than a general percentage copied from another contractor.
Calculate the Labor Burden
First, identify the annual or hourly employment costs paid in addition to wages.
Use:
Labor burden percentage = Additional employment costs ÷ Base wages × 100
For example:
- Annual base wages: $50,000
- Employer taxes, insurance and benefits: $15,000
- Labor burden percentage: $15,000 ÷ $50,000 × 100 = 30%
The burdened hourly rate can then be calculated as:
Burdened hourly rate = Hourly wage × (1 + Labor burden percentage)
If the hourly wage is $25 and the burden is 30%:
$25 × 1.30 = $32.50 per hour
Keep the supporting calculation and update it when wages, tax rates, insurance premiums or benefits change.
Account for Productive and Nonproductive Time
Employees are paid for more hours than can always be charged directly to a project. Travel, meetings, training, equipment preparation, shop work, paid leave and downtime may reduce the number of productive project hours.
When calculating an internal hourly labor cost, consider:
Cost per productive hour = Total annual employee cost ÷ Annual productive hours
For example:
- Total annual employee cost: $65,000
- Productive project hours: 1,600
- Cost per productive hour: $65,000 ÷ 1,600 = $40.63
Dividing by 2,080 paid hours instead would produce $31.25 and could understate the cost of each productive hour.
Use realistic historical information when estimating productive hours. Do not assume that every paid hour can be assigned to client work.
Estimate the Labor Hours Required
Divide the scope into measurable activities and estimate the crew hours required for each one.
Consider:
- Quantity of work
- Crew size
- Expected production rate
- Worker skill and experience
- Site access
- Existing conditions
- Setup and cleanup
- Material handling
- Coordination with other trades
- Inspection requirements
- Weather exposure
- Rework risk
Use:
Labor hours = Number of workers × Hours worked per worker
For example, a three-person crew working for four eight-hour days requires:
3 × 4 × 8 = 96 labor hours
Do not confuse labor hours with project duration. The example represents four working days but 96 labor hours.
Use Different Rates for Different Workers
A crew may include workers with different wages, burdens and productivity levels. Calculate each labor category separately when the difference is significant.
For example:
- Lead worker: 24 hours × $45 = $1,080
- Skilled worker: 48 hours × $38 = $1,824
- Helper: 48 hours × $26 = $1,248
- Total estimated labor cost: $4,152
Using one average crew rate can be practical, but the average must reflect the crew that will actually perform the work.
Review the planned crew composition. Assigning highly paid skilled workers to tasks that could be completed efficiently by trained helpers may increase the cost without improving the result.
Include Overtime and Premium Pay
If the schedule requires overtime, night work, weekends or other premium hours, calculate the additional cost correctly.
Consider:
- Overtime wage multiplier
- Payroll taxes affected by higher wages
- Shift differentials
- Additional supervision
- Reduced productivity during extended hours
- Transportation or meal allowances
- Local labor-law requirements
Do not apply the normal hourly cost to premium hours without checking how wages and related expenses change.
Accelerated work can require more workers or longer shifts while producing less output per hour. Include the expected productivity effect as well as the higher wage rate.
Include the Owner’s Project Labor
An owner-operator’s project labor is a real cost even when the owner does not receive an hourly paycheck for every hour worked.
Include time spent on:
- Physical project work
- Site supervision
- Material procurement
- Project-specific meetings
- Measurements and layout
- Coordination with subcontractors
- Inspections and client handover
- Project-specific administration
Use a reasonable internal labor rate for project work. Do not treat the owner’s time as free and then assume the remaining amount is profit.
General business management may belong in overhead, while time directly connected to a specific project may be included in job cost. Apply the chosen method consistently.
Separate Employee Labor From Subcontractor Cost
Subcontractor quotations should normally be recorded in the subcontractor cost category rather than combined with employee labor.
A subcontractor price may include:
- Their labor
- Materials
- Equipment
- Overhead
- Profit
- Taxes or fees
Confirm exactly what the quotation includes and excludes. The contractor may still need to provide supervision, access, protection, cleanup, permits or materials.
Worker classification is governed by applicable law and cannot be determined only by calling someone a subcontractor. Contractors should obtain appropriate professional advice when classification requirements are uncertain.
Calculate the Total Estimated Labor Cost
Calculate the estimated labor cost for each worker or labor category and then combine the results.
Use:
Estimated labor cost = Estimated labor hours × Burdened hourly rate
For example:
- Estimated labor hours: 120
- Burdened hourly rate: $38
- Estimated labor cost: 120 × $38 = $4,560
Add any separately calculated overtime, owner project labor or other labor-related cost that is not already included.
This amount is an internal project cost. It is not necessarily the labor amount displayed to the client, and it is not the final selling price. Overhead and profit must still be addressed through the contractor’s pricing method.
Track Actual Labor Hours During the Project
Record actual labor hours by employee, date, activity and project. Do not rely only on the total payroll amount.
Compare:
- Estimated hours
- Actual hours used
- Hours remaining
- Estimated labor cost
- Actual labor cost
- Forecast final labor cost
- Labor-cost variance
If a task is consuming more hours than planned, investigate the reason while work is still underway.
Possible causes include inaccurate quantities, difficult site conditions, low productivity, rework, waiting time, poor coordination or an unrecorded scope change. Early identification allows the contractor to adjust the plan and improve future estimates.
Avoid Common Labor-Costing Mistakes
Common mistakes include:
- Using wage rate as the complete labor cost
- Ignoring employer taxes, insurance and benefits
- Dividing annual cost by paid hours instead of productive hours
- Underestimating setup, cleanup and material-handling time
- Confusing project duration with total labor hours
- Applying one rate to every worker without review
- Omitting the owner’s project labor
- Treating subcontractor cost as employee payroll
- Ignoring overtime and reduced productivity
- Failing to compare estimated and actual hours
Maintain written support for labor rates and production assumptions. Update them using information from completed projects rather than relying indefinitely on old estimates
Include Labor in the Complete Job-Cost Estimate
Labor is only one part of the project cost. Combine it with materials, subcontractors, equipment, permits, contingency and allocated overhead before calculating the selling price.
For the complete costing structure, read Contractor Job Cost Estimate: What to Include Before Pricing a Project.
Use a Connected Labor and Pricing Workflow
Labor estimates should remain connected to the project budget, selling price and actual-cost record.
The AZELIVO Contractor Bid-to-Profit Toolkit provides four connected Excel tools:
- Job Cost Calculator
- Pricing Calculator
- Estimate Builder
- Profit Tracker
This workflow helps small contractors include labor in the internal job cost, calculate a selling price, prepare the client estimate and compare budgeted labor with actual project spending.
Conclusion
A contractor estimate should use the true cost of productive labor, not only the hourly wage. Employer-paid expenses, nonproductive time, overtime and owner labor can materially change the internal hourly cost.
Estimate labor hours by activity and crew type, then multiply them by appropriate burdened rates. Keep employee labor, owner project labor and subcontractor costs properly classified.
Finally, compare estimated and actual labor hours throughout the project. Accurate labor records improve current cost control and provide reliable production information for future estimates.