Labor Burden Rate for Contractors: How to Calculate Your True Cost Per Hour

A technician who earns $25 per hour does not cost $25 per hour. By the time you add what you pay on top of that wage, the real number is closer to $32 to $36 per hour for most contractors. That gap is called labor burden, and ignoring it is one of the most reliable ways to underprice jobs without realizing it.

Most contractors know this conceptually but estimate jobs using the wage rate anyway because the burden calculation feels complicated. It is not. You calculate it once per employee or once for a typical employee profile, and then you apply the result to every estimate going forward.

What Labor Burden Includes

Labor burden is every cost you incur as an employer beyond the base wage:

• Employer Social Security: 6.2% of gross wages, up to the annual wage base
• Employer Medicare: 1.45% of gross wages, no cap
• Federal unemployment tax (FUTA): 0.6% on the first $7,000 per employee per year
• State unemployment insurance (SUI): typically 1 to 5% depending on your state and claims history
• Workers' compensation insurance: varies widely by trade and state, from roughly 2% for office roles to over 15% for roofing
• Health insurance: the employer-paid portion of premiums
• Retirement contributions: if you offer a match or defined contribution
• Paid time off: vacation, sick days, and holidays represent hours you pay for but receive no billable output

How to Calculate Labor Burden Rate

Here is a worked example for a field technician earning $25 per hour:

This technician costs $32.14 per hour, not $25. If you estimate a 20-hour job using the wage rate, you budget $500 for labor. The actual cost is $643. That $143 gap per job compounds across your entire schedule.

The Multiplier Approach

Rather than calculating burden for every employee individually, most contractors use a burden multiplier. Divide the total annual labor cost by the annual gross wages to get a number that represents what each dollar of wage actually costs you:

A 1.29x multiplier means every dollar of wage rate costs you $1.29 all-in. To estimate labor cost for any job, multiply your technician's hourly wage by 1.29 and then multiply by the hours budgeted for the job.

Most contractors see multipliers between 1.25 and 1.40. Trades with high workers' comp rates, like roofing or demolition, often see 1.40 or higher. Businesses with limited benefits tend to land in the 1.25 to 1.30 range.

How Workers' Compensation Affects the Calculation

Workers' compensation is the most variable piece of the labor burden calculation, and it has the biggest range across trades. Rates are set per $100 of payroll and vary by state and job classification:

• Office and clerical: roughly 0.3 to 0.5% of payroll
• Plumbing and electrical: typically 2 to 5% of payroll
• HVAC and sheet metal: typically 3 to 7% of payroll
• Roofing: often 10 to 20% or higher depending on the state
• General construction: varies widely by scope and claims history

A roofer paying 15% of payroll in workers' comp is carrying a materially higher labor burden than an electrician paying 3%. If you operate in a high-rate trade and are not accounting for this in your estimates, the margin erosion is significant.

Why Paid Time Off Is Part of Burden

Paid time off is labor cost that produces no billable output. If you pay a technician for 2,080 hours per year but they are available for only 1,880 productive hours after vacation, sick days, and holidays, the cost of those 200 paid but non-productive hours spreads across the 1,880 billable hours. That is part of why the true hourly cost is always higher than the wage rate.

Using Labor Burden Rate in Estimates

Once you have your burden multiplier, apply it every time you estimate labor cost for a job. If a job will take two technicians eight hours each:

That gap per job might seem small. Across 15 jobs per month, it is $1,740 in unaccounted cost. Across a full year, it adds up to nearly $21,000 in margin that was never there to begin with.

How This Connects to Labor Cost Percentage

Labor burden rate is a per-hour number used in estimating. Labor cost percentage is a business-wide number used in financial review. They are related: if you consistently undercount labor cost in estimates because you are using the wage rate instead of the burden rate, your actual labor cost percentage will run higher than expected, and your gross margin will run lower.

Getting the burden rate right in estimates is one of the most direct ways to close the gap between the margins you expect and the margins you actually see.