CONSTRUCTION Accounting ARTICLE - Competitive Contractor Looks to Labor Burden Rate

Target Audience: Construction Industry Professionals, General Contractors, Construction Accountants

In a slowly recovering but still challenging local economy, a midsize excavation specialist wanted to bid on every job that came along. But he knew the dangers of over committing his company.

When a request for proposal (RFP) for a potentially lucrative job came along, he wanted some input on where he should focus his attention to stay within his means but still be competitive. So he turned to his financial advisor for guidance.

Beyond compensation

The first thing the advisor suggested was to look at the labor burden rate — a stat that measures the costs of labor beyond compensation. Putting a hard number to this concept could help the contractor determine his true costs and prepare a feasible bid.

Both direct costs (expenses tied directly to the project, such as subcontractors, materials, permits and equipment rental) and indirect costs (employee-related expenses, such as paid time off, benefits and workers’ compensation), the advisor noted, would be essential in determining the labor burden rate on the job in question. Calculating that rate would entail applying the following formula:

Number of actual production hours / the total cost of the employee =

Employee labor burden cost per production hour

So, the advisor continued, say you have an employee who earns $18 per hour for $37,440 annually. To determine the actual number of production hours, you’d multiply 52 weeks per year by 40, the number of hours in his workweek, resulting in 2,080 annual hours. After factoring holidays, vacation days, sick time and training, the worker’s estimated average labor time was cut by about 300 hours annually, leaving him available for approximately 1,780 hours of production work.

Indirect costs included $3,200 in payroll taxes, $3,700 in workers’ compensation, $4,500 in health insurance, $1,100 in retirement benefits, $3,500 for company vehicle use, $1,000 for cell phone costs and $500 in training fees. These expenses totaled $17,500, making the annual cost of this $18-an-hour employee $49,540.

Dividing the total cost of the employee ($49,540) by actual production hours (1,780) shows that the employee actually cost the contractor $27.83 per hour.

Closer attention

After calculating the labor burden rate for all of his employees, the contractor found that his workers were typically costing him 50% to 150% or more of their gross hourly labor rates. Clearly, he agreed, this issue warranted closer attention. His advisor suggested the contractor review his labor burden rates every six months or whenever other pertinent changes occur (such as insurance cost fluctuations).

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