What is labour burden in construction and how do you calculate it?

Written by LetsBuild

Labour burden in construction | LetsBuild

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If you want to run a profitable construction business, you need to know exactly how much running it costs. Labour is a significant part of those costs, but you need to look way beyond salary to find an employee’s true cost.

But how do you know how much each employee is really costing you?

That’s where labour burden and labour burden rates come in. We’ll explore what labour burden is, its importance in the industry, how to calculate it, and more—keep reading to gain a better understanding of the costs of running a construction company.

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What is labour burden in construction?

The total costs of your employees’ benefits and compensation are your labour burden. This is typically calculated as a percentage of your payroll.

Labour burden includes everything from salary and wages to PTO, insurance, taxes, and more.

Understanding labour burden costs is beneficial for construction managers and business owners for various reasons.

  1. Measuring labour burden allows you to calculate the true cost of your employees. Because labour burden rates include all of the indirect costs associated with your workers, you get a realistic look at what it costs to employ different people in different positions.
  1. Calculating labour burden costs helps you give better price estimates. Pricing each project accurately is what determines whether you make a profit or lose money on the job. If you underprice work because you don’t understand how much labour burden affects your costs, you risk losing money and sustainability.
  1. Knowing your labour burden rate gives you a benchmark to compare against. You can compare your company’s true labour costs against competitors and similar businesses to see how you compare and identify areas where you can make improvements.

Why is managing labour burden necessary?

Other than the points we discussed above, managing your labour burden is essential if you want to create accurate budgets. It’s impossible to make informed decisions about hiring and pricing without knowing how much labour costs affect your budget.

Labour burden management is the key to avoiding cost overruns and optimising your pricing strategies.

Of course, managing your labour burden also directly affects your company’s bottom line—if you don’t pay workers properly and on time, it lowers productivity and puts your businesses at risk of legal issues for unpaid wages.

So, without effective labour burden management, construction companies operate with higher overhead costs, decreased profit margins, and less productive employees.

Tips for managing construction labour burden

Labour burden is a huge expense for construction companies; keeping it under control is crucial for the sustainability and profitability of your business. But with so many factors affecting labour burden rates, how do you know where to start?

  1. Use construction management software. You can leverage technology to automate admin tasks, reduce employee workload, and manage labour burden from anywhere.
  1. Keep your labour information up to date. Other than understanding each component of labour burden calculations, you need to keep the latest labour data at your fingertips.
  1. Track your payroll costs. Check on your payroll costs—salaries, wages, bonuses, etc.—regularly to ensure you’re not paying out for work that hasn’t been done.
  1. Take steps to minimise turnover. Turnover is a significant expense in the construction industry, and keeping your workers happy results in better labour burden rates—hiring new employees is much more expensive than working to retain the ones you already have.
  1. Work with contracted labour. When your construction company needs temporary help, look into hiring contract workers; because they don’t get benefits from your company, this can help reduce your overall labour burden costs.

If you can implement processes to manage your labour burden rates better, you can save your company money and improve its overall efficiency.

How to conduct a construction labour burden assessment

Before calculating your labour burden costs and rate, it’s a good idea to conduct a labour burden assessment. This includes optimising how you track employees and knowing which costs affect your overall labour burden.

Implement technology for time tracking and labour management

Construction management software that can streamline administrative tasks makes managing labour burden much simpler.

When you can track on- and off-site activities in real time from anywhere, you can ensure your scheduling is on point—when the right people are on the right job, your labour rates are sure to be better than if you overallocated employees or put the wrong contractors on the wrong sites.

Even small construction projects require a massive amount of collaboration between different departments and workers, which is difficult to manage manually.

In addition, time-tracking software is more accurate and less time-consuming than having each worker manually submit their hours to you at the end of the day. When you understand how much time each person spends on a project, you can work towards better pricing and scheduling, ensuring a profit and decreasing overhead costs.

Know what direct and indirect costs to include in your calculations

First, you’ll need to know your direct labour cost—the wages paid to an employee, including bonuses, overtime, and paid training. Determining this number is simple: multiply their hours worked by their hourly rate.

Then, you’ll need to factor in the indirect labour costs; this is where things can get a little tricky. Indirect costs are necessary for your business and impact your profit margins, but not all of these costs are apparent; some may fluctuate while others stay the same.

Indirect costs include:

  • Payroll taxes
  • Health insurance and benefits
  • Paid sick/vacation time
  • Liability and workers’ comp insurance
  • Vehicle expenses and insurance
  • Profit-sharing
  • Employee equipment and supplies
  • Time spent commuting or in meetings

If your company uses lots of heavy equipment, indirect costs could also include maintenance, depreciation, fuel, repairs, etc. In these cases, we recommend calculating those costs separately with an equipment burden rate—divide the equipment’s indirect costs by its used hours.

So, now you know how to calculate your direct labour costs and have an idea about what indirect costs affect your labour burden, it’s time to calculate your labour burden rate.

More to read: 6 tips for coordinating subcontractors and suppliers for short-term planning success

tips for coordinating subcontractors and suppliers for short-term planning success | LetsBuild

How to calculate labour burden and labour burden rate

The most important thing to consider before calculating your labour burden is that you need an accurate measurement of all of your direct and indirect costs. Without up-to-date information, your labour burden rate will be off and likely cause more harm than good.

Once you’re armed with the numbers you need, it’s time to crunch them.

  1. Start with time. Any time you’re paying an employee, it factors into your labour burden rate.
  1. Determine your direct labour costs. We mentioned this above: multiply the employee’s total hours by their wage.
  1. Add your indirect costs. These will vary based on your business operations and the benefits you provide to employees.
  1. Calculate your total labour costs. Take your direct labour costs and add your indirect costs to get your total labour cost (labour burden).
  1. Figure your labour burden rate. Finally, divide the total labour cost by the number of hours worked and divide it by 100 to express labour burden as a percentage.

Sound confusing? Let’s run through a simple example.

George makes $30 per hour and works on a project for 40 hours weekly. His direct cost of labour is $1,200. Let’s say his indirect costs are $400, making his total labour cost $1,600. This is the true cost of having George work on a project for 40 hours per week.

If we want to calculate his labour burden rate, we divide $1,600 by 40 to get 40. Divide that by 100, and we get 0.4—George’s labour burden rate is 40%.

How often do you need to calculate labour burden rate?

Your indirect costs likely change frequently, affecting your labour burden rate. If you know of any changes that are likely to affect your indirect costs, you’ll want to recalculate your labour burden ASAP. 

If you’re unsure about whether your indirect costs have changed, you’ll still want to recalculate your labour burden rate regularly—every 6 months to a year.

Tracking time, hours, and other labour costs to determine your labour burden rate can be challenging and time-consuming if you’re still doing it all manually.

The solution? Digitalisation

Track your labour and calculate your labour burden with LetsBuild

While the best way to track, calculate, and manage labour burden varies between companies—every construction firm differs in scope and size—there’s one strategy that makes it easier for everyone: Construction management software.

What if you could track and record everything that happens on site (hours worked, equipment used, tasks performed, etc.) instantly from anywhere? Well, now you can; let us introduce LB Site Diary.

With a digital site diary, creating your construction daily logs just got easier. You can view labour hours, see who’s on site, observe time spent on different activities to ensure the timely completion of tasks, gain insights into future scheduling and pricing, and make changes on the fly to boost efficiency and cut costs.

Maybe it’s time to stop running from site to office with a handful of paperwork every day. Maybe it’s time to stop relying on employees to submit their own hours. Maybe it’s time to start working toward digitalisation and automate your labour burden calculations. Maybe it’s time to focus on what we do best—build.

Is there a good reason you’ve been putting off implementing technology to handle your administrative tasks, giving you more time to spend on more important aspects of your business? We can’t think of any.