Even if you accurately estimate the hours required to complete a project, you may be losing money if you're not charging enough for labor. Suppose you pay a carpenter $20 per hour. To figure out how much you should be charging to cover costs over and above hourly wages, look at the following list of labor burden charges:
| FICA | 7.65% (15.3% for self-employed workers) |
| FUTA/SUTA | 1% (Federal and State Unemployment Tax) |
| Workers' Comp | 10% (varies widely by state and trade classification) |
| Health Insurance | 12% (based on $5,000 per year per employee) |
| Vacation | 4% (two weeks paid vacation) |
| Holidays | 2% (6 major holidays) |
| Personal/Sick Pay | 2% (5-6 days) |
| Tool Allowance | 1% (based on $450 allowance per year) |
| Escalation | 2.5% (Assumes a $1 pay raise for 6 months of the year) |
| Total Labor Burden | 42.15% |
This means that a carpenter who is being paid $20 per hour should be billed at $28.43.
Where do these numbers come from? FICA and workers' comp are all based directly on payroll (although FICA is not paid on individual wages above $80,400). The combined FUTA/SUTA rate is 6.2% of the first $7,000 (about $434 per employee), with SUTA payments credited toward FUTA payments in many states. Charging 1% of total payroll as shown here will more than cover unemployment taxes. Health insurance costs vary from year to year, so be sure to make adjustments when you renew your policy. Escalation allows for pay raises, overtime, and other unpredictable labor costs and is based, along with the remaining labor burden percentages, on actual hours worked, which I calculated for this example as 1,912 hours.
| 2,080 work hours available (52 weeks x 40 hours/week)minus 80 hours vacation (2 weeks x 40 hours/week)minus 48 hours holidays (6 major holidays x 8 hours/day)minus 40 hours personal/sick days (5 days x 8 hours/day)=1,912 total annual hours |
To find the burden percentage for vacation pay, for example, divide vacation hours by total working hours (80 divided by 1,912), or about 4%.
If you add 45% to 50% to actual wages, you'll probably cover your costs. But if your benefits vary significantly from those in this example -- more or less vacation pay or a higher workers' comp rate -- the safest play is to calculate labor burden for each employee. Then be sure to use the total labor rate -- wages plus burden -- as a direct cost when preparing estimates.
