Jim Huston Certified Professional Landscape Estimator, J.R. Huston Enterprises, Inc.

Calculating Your Labor Burden

Misconceptions, faults and outright mathematical errors exist in the minds of many contractors when it comes to using margins and markups in their estimating systems. Conventional wisdom can get the contractor into serious trouble if he does not understand the limitations of both when used in the bidding process.

When it comes to knowing your true labor costs as a business owner or manager, calculating your hourly or weekly wage costs is just part of the picture. A more complete picture includes your “labor burden.”

Consisting of all those “extra” costs above and beyond the pay scale of your employees, labor burden is primarily comprised of payroll taxes, unemployment taxes and various forms of insurance. Field labor burden also includes general liability; workers’ compensation insurance; paid holidays, sick days, and vacations; and medical insurance benefits.

Also included is a range of taxes with catchy acronyms such as FICA, FUTA and SUTA, all which directly correlate to your office and field payroll. Items such as a 401K or other retirement plan should also be included if you offer such benefits.

Both field labor burden and office labor burden are calculated as percentages and should be added to your payroll costs. Field labor burden is a direct cost, while office labor burden is an indirect G&A (general and administrative) cost.

Prevailing Rates

Check your bid documents and specifications, or call your contract administrator to ensure that the figures you’re using are correct. Most labor burden items (FICA, FUTA, SUTA, WCI, GLI) are assigned to you as a fixed percentage that will vary little when calculated into your labor burden. For instance, FICA is currently 7.65 percent. This doesn’t change, whether you’re calculating labor burden for prevailing wage projects or non-rated ones.

Other labor burden items, such as sick pay, paid holidays, and vacation time, are based on accumulated paid non-work time (usually measured in days or hours) and need to be calculated differently when bidding rated or non-rated jobs.

The typical range for labor burden is between 12 and 15 percent for office personnel, and 20 to 35 percent for field personnel, depending on the amount of workers’ compensation insurance for each job classification.

Reviewing “Budget” to “Actual”

Labor burden calculations should be reviewed every four to six months and adjusted whenever your insurance rates change, or you find that your profits are thinning. You should also review your labor burden calculations if you’re bidding on rated jobs and you have not done so in a while.

Accounting software is available that enables managers to produce financial statements that display labor burden “budgeted” for actual field and office payroll, compared to “actual” accumulated expenses for labor burden items. This is an excellent method for ensuring that your calculated labor burden percentages are adequate.

Consider establishing a labor burden checking account, into which you deposit and accumulate labor burden funds. This amount is determined simply by multiplying your payroll (e.g., $3,000) by your labor burden percent (e.g., 32 percent). That amount ($960) is then deposited into a labor burden checking account. These funds are accumulated, and all labor burden items (including holidays, vacations, etc.) are paid from that account.

If your percentages are correct, you should be able to pay all labor burden expenses from that account. If you can’t cover labor burden expenses from it, your calculations need to be revised.

View Labor Burden as an Incentive

I’ve had contractors ask me if they should provide certain labor burden items, such as vacation/holiday/sick pay, or medical/dental insurance as an incentive to productivity. The answer is no, because these benefits don’t significantly increase productivity by themselves. They should be viewed as a reward for work well done.

So if you want to increase productivity, provide your people with: well-defined, reasonable goals and budgets; timely and accurate feedback; fair-market wages; and results-oriented incentives.

Final Thought – Plan Ahead!

Future labor burden costs are often overlooked, which can jeopardize your business’s health. For instance, if you double your field work force, your workers’ compensation insurance bill will double and you will have to pay the increase when you get audited—usually at the end of the year. Labor burden costs should be monitored and accumulated in a savings account. Otherwise, they may be forgotten and the funds spent elsewhere.

Jim Huston is president of J.R. Huston Enterprises, Inc., which specializes in construction and services management consulting to the Green Industry. He holds the distinction of being one of only two Certified Professional Landscape Estimators in the world. Jim Huston is president of J.R. Huston Enterprises.