Labor is almost always the largest single expense in a contracting business. But tracking what you spend on payroll in raw dollars tells you less than tracking it as a percentage of revenue, because the percentage reveals whether your crew's output is proportional to what you are charging for their time.
A labor cost percentage that stays in range means your pricing, scheduling, and crew productivity are working together. One that creeps up quarter over quarter is a signal that something has slipped, even if total revenue is growing.
How to Calculate Labor Cost Percentage
Formula: Total Labor Cost / Total Revenue x 100
Run this calculation for a full month or quarter rather than per job. The per-job version is useful for estimating, but the business-wide percentage reveals patterns that individual jobs obscure.
What to Include in Total Labor Cost
Many contractors calculate labor cost using only base wages, which understates the true number. Your total labor cost should include:
- Gross wages paid to all field employees for the period
- Employer payroll taxes: Social Security (6.2%), Medicare (1.45%), and unemployment (FUTA and state)
- Workers' compensation insurance premiums
- Overtime premiums paid above the straight-time rate
- Benefits such as health insurance and retirement contributions
For a detailed breakdown of how these costs add up per employee, see the labor burden rate guide linked below. The full burden is typically 25 to 40 percent above the base wage, which is why using just wages understates your real labor cost.
Worked Example
Your business generates $80,000 in revenue in a month. Your total labor cost for the same period, including wages, taxes, workers' comp, and benefits, is $28,000.
$28,000 / $80,000 x 100 = 35%
A 35% labor cost percentage is at the high end of the healthy range. It is not a problem on its own, but if it climbs to 38% or 40% over the next two months without a corresponding change in revenue or job mix, that is worth investigating.
Benchmark: 25 to 35 Percent
- Below 20%: unusually low, verify all labor costs are captured
- 20 to 35%: healthy range for most contractors
- 35 to 40%: approaching high, review scheduling efficiency and job pricing
- Above 40%: margin warning, investigate root causes before it compounds
How Labor Percentage Varies by Trade
The 25 to 35 percent benchmark is a reasonable starting point, but trade structure affects the number:
- Painting, cleaning, and other labor-intensive trades: labor percentage often runs in the 35 to 45 percent range because materials costs are low relative to revenue
- Roofing and HVAC: materials and equipment are a larger share of costs, so labor percentage may run lower, sometimes in the 20 to 28 percent range
- Plumbing and electrical: depends heavily on job mix between service calls (higher labor percentage) and new installation (more materials)
Track your own number over time rather than chasing an industry average that may not reflect your trade. What matters is consistency and direction.
What Pushes Labor Percentage Above 40 Percent
- Scheduling gaps: technicians who are paid 8 hours but only billable for 5 or 6 drive up labor percentage
- Excessive overtime: paying time-and-a-half increases labor cost without proportionally increasing what you bill
- Underpricing labor-intensive jobs: taking jobs at low margins because they seem simple pushes labor percentage up across the board
- Crew size mismatches: sending three people to a job that needed two inflates labor cost per job
- Administrative tasks in the field: time spent on paperwork, parts runs, or waiting that is not billable drags the percentage up
How to Bring It Down
- Tighten scheduling to reduce idle time between appointments and increase billable hours per technician per day
- Cluster jobs geographically so technicians spend less time driving and more time working
- Price labor-intensive job types at higher rates to reflect the actual labor burden they carry
- Identify the jobs that consistently run over on hours and either reprice them or adjust your process
- Move administrative work off field staff so technicians are not burning billable time on paperwork
IRONGRID logs hours per job for every team member. That data lets you calculate labor cost per job and spot which job types or which technicians are consistently over on hours, so you can address the root cause rather than managing by total.
See how time tracking works in IRONGRIDHow Labor Percentage Connects to Gross Margin
Labor cost percentage and gross profit margin are two views of the same underlying reality. If labor percentage rises by 5 points without a corresponding drop in materials cost, gross margin will fall by roughly 5 points. They move together.
That is why tracking both metrics matters. Gross margin tells you whether the business overall is hitting its target. Labor percentage tells you whether it is a labor problem, which has different solutions than a materials cost problem or a pricing problem.
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