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Understanding Labor Burdens

Inaccurate labor burdens can cause a job to look bad, even when the labor hours and material costs are within budget. 

Labor Burdens are the “hidden costs” associated with each employee.  The labor burden is the difference between what is paid to the employee and what it costs the employer.  The labor burden will vary per employee.  Typically, each employee has different labor burden costs, here’s a sample:

  • Health insurance
  • Paid time off
  • Workers compensation insurance
  • Training
  • Union Benefits
  • Company Benefits
  • Taxes

Labor burdens also include non labor costs such as company cell phones, uniforms, vehicle usage (depreciation, gas & oil, maintenance, license, insurance) small tools and equipment usage.  All of these labor burden costs need to be accounted for in order to establish the true cost per worker.  If you have payroll changes throughout the year, you’ll want to review your labor burdens and update them accordingly. 

Contractors often have a difficult time determining their labor burden because their contractor accounting software isn’t designed to automatically breakout the costs and sales by job type.

A Case Study

Why different types of Jobs require different labor burden rates.   Some jobs are more difficult and dangerous than others.  Recently, a plumbing contractor told us that a number of their employees do underground sewer jobs where the work is very dangerous.  Other times, these same employees work on residential homes replacing/installing plumbing fixtures. The sewer jobs require a higher workman’s compensation rate than the residential jobs. Our customer had recently overpaid on their workman’s compensation insurance by paying the higher sewer rate for all hours worked. 

Here’s how to avoid paying higher workman’s compensation.  We told our plumbing contractor about COBRA’s Job Type Codes and how they group a contractors business into sectors for better, more accurate reporting.  Depending on which type of job the worker was doing, COBRA produced the correct amount of workman’s compensation owed based on each individual’s actual hours worked within the Job Type.  Our plumbing contractor is no longer paying extra dollars on his workman’s compensation insurance. 

Why Vehicles should be considered a Labor Burden and not Overhead.  Some may argue that a vehicle is considered overhead however, we beg to differ.  While you need vehicles to operate your business, we think there’s a good reason to consider them a labor burden:    

When vehicles are assigned to different workers, the labor cost (burden) will vary based on the job type.   For example, vehicle # 1 is used by our service tech while vehicle # 2 is used by our foreman on long-term projects.  Our service tech travels around the area doing one service call after another accumulating more wear and tear and higher maintenance costs than vehicle # 2.    

Never combine your labor burdens and overhead together.   Generic Accounting programs often don’t have the built-in features to easily track labor burden and overhead.   Combining these together will only muddy up the water, preventing the contractor from understanding what jobs are truly costing their company. 

And finally…….knowing which jobs and workers require which labor burdens is critical.  A COBRA business professional is available to discuss this with you so can achieve the best results for your contracting business.  



One Response to “Understanding Labor Burdens”

  1. It’s hard tto come by knowledgeable people for this subject, but
    you sund like you know what you’re talking about!

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