How to calculate your labor burden rate, and the divisor that ruins it

Three numbers in a subcontractor’s office depend on one nobody can produce on request: what an hour of your crew’s time actually costs.

Your bid uses it. Your T&M rates are built on it. Your job cost report is wrong without it. And in most shops it is a percentage somebody worked out three or four years ago that everybody now repeats.

This article is about that number — the cost of an hour. What you then charge for an hour is a different question, and how to price a T&M ticket answers it: markup, overhead and profit, overtime premium, material and equipment. Burden is the input that goes in first.

The figures below are round and invented, used only to show the shape of the arithmetic. Tax rates and wage bases change every year, so confirm the current ones with your CPA. Workers’ comp and unemployment rates vary by state, class code and carrier. This is not tax or accounting advice.

What is burden and what is overhead

Burden is the cost that attaches to an hour of labor. Overhead is the cost of being in business at all. The test: would this cost go away if that hour were never worked? Payroll taxes on the wage would. The office rent would not.

So burden is employer payroll taxes, workers’ comp, payroll-rated general liability, the employer share of insurance, the retirement match, union fringes, paid time off, field allowances, and training and compliance. Not burden: office salaries, rent, your software, the estimator, the owner’s truck, interest on the line of credit. Those are overhead, recovered through markup.

That line matters, because of one expensive mistake: putting overhead inside the burden, then applying overhead and profit on top of the burdened cost. You have now charged for the office twice. A reviewer taking a T&M rate apart looks for exactly this.

Small tools and consumables are the honest gray area. Either they live in burden or they get billed as material — never both. Pick one, write down which, and be consistent across bids, tickets and job costing.

The components, and where each number actually comes from

The arithmetic is easy. Finding the inputs is the work. For each one, the document that has the real answer:

Social Security and Medicare. 6.2% up to an annual wage base that changes each year, plus 1.45% with no cap — 7.65% under the base. Where: your quarterly 941.

Federal unemployment. A rate on the first $7,000 of each employee’s wages, with a state-tax credit that drops the effective rate sharply in most states. Where: Form 940. Note the shape — fixed dollars per head, not a percentage of the wage.

State unemployment. Your experience rate, on your state’s wage base. Where: the rate notice the state mails each year. It moves with your own claim history.

Workers’ compensation. A rate per $100 of payroll, per class code, times your experience modifier. Where: the declarations page of the policy. The biggest source of variation between two employees in the same company — an electrician’s class code and a roofer’s are not in the same universe. Self-perform more than one kind of work and one company-wide comp percentage is a guess.

General liability and excess. Often payroll-rated too. Where: the policy’s audit basis.

Health and other insurance. The employer share, per enrolled employee per month. Where: the carrier invoice. Dollars per head, not a percentage of wage — a difference that drives the whole next section.

Retirement match. A percentage of wages, capped by your plan document.

Union fringes. If you are signatory, most of this is handed to you per hour on the wage schedule, by classification — genuinely easier than the open-shop version.

Paid time off, holiday and sick. Hours you pay for that produce nothing billable. Handle them as a cost line or through the divisor — never both.

Allowances, training and compliance. Truck, fuel, phone, certification renewals, physicals, drug testing. Dollars per head.

The divisor is where most burden rates go wrong

Add up the costs and you have a numerator. Then you divide by hours, and almost nobody stops to ask which hours. There are two defensible answers, and they are not close to each other.

Take a journeyman at a $38.00 base wage, 2,080 paid hours, so $79,040 in wages.

• Social Security and Medicare, at 7.65% of wages — $6,047
• Federal and state unemployment, per head — $1,400
• Workers’ comp, at $8.00 per $100 of payroll — $6,323
• General liability, at $1.00 per $100 of payroll — $790
• Health insurance, employer share at $750 a month — $9,000
• Retirement match, at 3% of wages — $2,371
• Truck, fuel and phone, per head — $3,600
• Training, certification and physicals, per head — $600

Total burden: $30,131 a year.

Divisor one: all paid hours. $30,131 over 2,080 hours is $14.49 per hour, or 38.1% of the base wage. Cost per paid hour: $52.49.

Divisor two: chargeable hours. This employee is not on a job for all 2,080. Say 80 hours of holiday, 80 of PTO and 24 of training and safety meetings — 184 paid hours that never hit a job, leaving 1,896 chargeable.

Total annual cost is wages plus burden: $109,171. Over 1,896 chargeable hours that is $57.58 per hour, which against the base wage is 51.5% burden.

Same employee, same real costs: 38.1% or 51.5%, on a choice most offices make without noticing.

Which one to use, and when

Both are right. They answer different questions.

“What did this hour cost us?” — the paid-hours rate. Every paid hour carries the same burden, the math ties straight back to the payroll register, and nothing in job costing is inflated by an assumption about recovery. Use it to cost hours to a job.

“What must we recover per billable hour to break even?” — the chargeable-hours rate. Only chargeable hours get billed, so only they can carry the cost of the ones that are not. Use it to bid and to set T&M rates.

Use the first where you needed the second and you bid every job thirteen points light on labor. On a labor-heavy scope that is the entire margin.

One rate per company is the second mistake

Burden is usually quoted as a percentage of wage, which quietly implies the percentage is stable. It is not, because several of the biggest components are dollars per head.

Run the same stack for an apprentice at $22.00 an hour, same company and same benefits. Taxes, comp and the match scale down with the wage. The $9,000 health premium, the $1,400 of unemployment tax and the allowances do not. Total burden: $23,592 — $11.34 per paid hour, or 51.6% of a $22.00 wage, against 38.1% for the journeyman.

The apprentice costs fewer dollars and carries a higher burden percentage, because fixed costs are a bigger share of a smaller wage. The unemployment taxes are nearly identical in dollars, because both employees blow past the wage bases in the first quarter.

So calculate burden per classification, or at minimum per comp class code. A single company average overstates your journeymen and understates your apprentices, and when the crew mix shifts between bid and build it silently moves your margin.

Two related effects worth knowing rather than chasing:

• Unemployment wage bases run out. Those taxes stop once an employee passes the base, so the true monthly percentage is higher in January than in October. An annual rate is right on average and wrong at both ends of the year — usually why first-quarter job costs look heavy.
• Overtime premium carries less burden. Taxes and comp ride on the premium half-hour; health insurance and the truck allowance do not. The billing side of that is in how to price a T&M ticket.

Check the number against what you actually paid

A calculated burden rate is a model. Once a year, test it against the books: gross field wages off the payroll register, the comp premium after audit, the benefit invoices, the tax deposits, the allowances. Divide the burden total by field hours for the same period. More than a point or two from your calculated rate and something is stale — usually the comp modifier or a benefit renewal.

Redo it whenever the comp policy renews or the modifier changes, benefits renew, the state sends a new unemployment rate notice, you give a wage increase, or the crew mix shifts materially.

If you have not run it since the last comp renewal, expect it to have moved — and the billing rate built on it has not.

Where the number gets spent

The rate shows up in four places: your bid, your T&M rate list, your job cost report, and any make-or-buy call about self-performing a scope.

In SubMark, the relevant mechanics:

• Job costing shows labor at wage cost, not burdened cost. Logged hours are multiplied by each hourly worker’s rate (a day rate is converted to hourly; salaried and piece-rate workers are left out of job cost). Compare it against your bid’s unburdened labor line, or apply your burden when you read it.
• Hours cost at the rate that applied when the hours were logged, so a mid-year wage increase does not retroactively rewrite last quarter’s job costs.
• T&M tags price off the rate lists you load — where your burdened cost plus markup becomes a published billing rate.
• Labor reports and job costing read the same hours the time clock and the daily log captured. Tracking labor hours by job and cost code is the companion to this article, because a burden rate applied to hours nobody coded correctly produces a confident wrong answer.

Honest limits: no burden calculator, no payroll module, and no burden setting on the job cost screen. Labor there is wage cost. SubMark does not read your comp policy, your tax deposits or your benefit invoices — you do this arithmetic once a year and carry the result into your bids and your T&M rate lists, which is where it changes what you charge.

There are dedicated pages for job costing and T&M tickets. Office staff are what you pay for, and field users are free and unlimited — see how pricing works.

The five-line version

1. Burden is every cost that attaches to an hour. Mixing overhead in means charging for the office twice.
2. Get the inputs off real documents: the 941, the state rate notice, the comp declarations page, the benefit invoices.
3. Decide your divisor on purpose. Paid hours answers “what did it cost”; chargeable hours answers “what must we recover.” Thirteen points apart.
4. Calculate it per classification. Fixed-dollar costs make the lower wage carry the higher percentage.
5. Reconcile against the books once a year, and whenever comp, benefits or wages move.

None of this is accounting tidiness. A sub who knows their burden to the dollar can hold a rate in a negotiation, because they can show where every piece came from. A sub repeating a number from 2022 cannot, and the GC’s project manager can tell.