Most contractors dramatically underestimate their labor costs—and it's killing their profits. They look at what they pay workers per hour and use that number in estimates, forgetting about taxes, insurance, benefits, and all the other costs that come with employment.
This guide shows you how to calculate your true labor costs so you can price jobs accurately and actually make money.
Why Labor Costing Matters
Consider this scenario: You pay a worker $25/hour. You estimate a job will take 8 hours, so you allocate $200 for labor. Simple, right?
Wrong. That $25/hour actually costs you $35-45/hour when you factor in everything. Your "8-hour" job actually takes 10 hours when you include setup, teardown, and travel. Your true labor cost is $350-450, not $200.
Multiply that mistake across dozens of jobs per year, and you're losing tens of thousands of dollars.
Understanding the Burden Rate
Your "burden rate" is what an employee actually costs you beyond their base wage.
Components of Burden Rate
1. Payroll Taxes (Mandatory)
- Social Security (employer portion): 6.2%
- Medicare (employer portion): 1.45%
- Federal Unemployment (FUTA): 0.6%
- State Unemployment (SUTA): 2-6% (varies by state and history)
- Total payroll taxes: 10-14%
2. Workers' Compensation Insurance
- Rates vary by trade and state
- Painting/general contracting: 5-12%
- Roofing/high-risk trades: 15-30%
- Get your actual rate from your insurance agent
3. General Liability Insurance Allocation
- Some policies charge per $1,000 of payroll
- Allocate this cost per labor hour
- Typical: $2-5 per hour
4. Benefits (If Provided)
- Health insurance: $3-10/hour equivalent
- Retirement contributions: 3-6% of wages
- Paid time off: 4-8% of wages
- Tools and uniforms: $1-3/hour
Calculating Your Burden Rate
Example for a $25/hour employee:
Base wage: $25.00
- Payroll taxes (12%): +$3.00
- Workers comp (10%): +$2.50
- GL insurance allocation: +$2.00
- Benefits equivalent: +$3.50
Burdened hourly rate: $36.00
That's 44% higher than the base wage!
Beyond the Burden Rate: True Labor Cost
The burden rate is just the start. Your true labor cost also includes:
Non-Billable Time
Not every hour you pay for is productive work:
- Travel to and from jobs
- Morning meetings and assignments
- Pickup at supply houses
- Estimating and callbacks
- Warranty and punch list work
- Training and certifications
Productive efficiency: Most contractors achieve 70-80% productive time. If you pay for 40 hours, only 28-32 are actually spent on billable work.
Calculating True Hourly Cost
True hourly cost = Burdened rate ÷ Productivity factor
Using our $36/hour burdened rate at 75% productivity: $36 ÷ 0.75 = $48/hour true cost
That $25/hour employee actually costs $48/hour in productive time.
Equipment and Tool Costs
Workers use your equipment. Factor in:
- Tool replacement and maintenance: $2-5/hour
- Vehicle costs if you provide transportation: $5-15/hour
- Safety equipment replacement: $1-2/hour
Fully loaded labor cost: $48 + $7 = $55/hour
The Labor Pricing Formula
Now you can price labor correctly:
Labor price = True hourly cost × Estimated hours × (1 + Profit margin)
Example:
- True hourly cost: $55
- Estimated hours: 8
- Profit margin: 25%
Labor price = $55 × 8 × 1.25 = $550
Compare that to the naive calculation of $25 × 8 = $200!
Calculating for Different Scenarios
Solo Contractor
If you're the only worker, your labor cost is your opportunity cost—what you need to earn to make the business worthwhile.
Consider:
- What salary would you need as an employee? ($60K? $80K?)
- Divide by productive hours (1,500-1,800/year realistic)
- Add burden rate factors for self-employment tax, insurance, etc.
Most solo contractors should charge $50-100/hour for their time.
Crew Leader + Helper
Calculate separately:
- Crew leader at higher burden rate
- Helper at lower burden rate
- Add together for crew cost per hour
Example crew cost:
- Crew leader: $55/hour true cost
- Helper: $35/hour true cost
- Crew rate: $90/hour
Subcontractors
Subs are simpler—their quoted rate is your cost. But still add:
- Your overhead allocation for managing them
- Profit margin for taking the risk
- Markup typically 15-25%
Allocating Overhead to Labor
Your business has overhead whether you work or not:
- Rent/mortgage
- Insurance
- Phones and internet
- Software
- Marketing
- Vehicle payments
- Professional services
Overhead allocation method:
- Calculate total monthly overhead
- Estimate productive labor hours per month
- Divide overhead by hours = overhead per hour
Example:
- Monthly overhead: $4,000
- Productive hours/month: 160
- Overhead per labor hour: $25
Add this to your labor rate or allocate per job.
Common Labor Costing Mistakes
1. Using Base Wage in Estimates
Never use $25/hour when the true cost is $55/hour.
2. Ignoring Non-Productive Time
If setup takes 30 minutes, that's labor cost even though nothing is "installed."
3. Forgetting Training Time
New employees are less productive. Factor in learning curve.
4. Not Tracking Actual Time
Compare estimates to actual hours. Adjust your estimating if you're consistently wrong.
5. Underestimating Crew Size Needs
Sometimes two people for 4 hours is cheaper than one person for 10 hours.
Using Software to Track Labor
Manual tracking is tedious and error-prone. Modern contractors use software to:
- Track actual time per job
- Compare estimated vs actual
- Calculate true job costs
- Identify profitable vs unprofitable job types
Tools like SnapBid help you estimate labor accurately upfront, so you're not guessing.
Putting It All Together
Your labor pricing checklist:
- ✅ Calculate burdened hourly rate for each employee type
- ✅ Adjust for productivity/efficiency factor
- ✅ Add equipment and tool costs per hour
- ✅ Allocate overhead per labor hour
- ✅ Multiply by estimated hours
- ✅ Add profit margin
- ✅ Track actual vs estimated and adjust