Calculating Labor Burden Can Make or Break Profitability

We know our construction clients spend countless hours estimating and pricing out jobs for proposals. While these labor-intensive steps are necessary in order to win business, the critical point is making sure these proposals will be profitable if the company does land the job. Without including a burden rate, the chance of profitability decreases exponentially.

When estimating construction jobs, the bidder needs to take into account the full spectrum of requirements including the actual cost of employing a staff member aside from the salary the employee earns. Earnings alone do not accurately reflect the cost of employing an individual. Labor burden costs account for additional employee overhead-related items such as insurance and taxes, for example.  

Many companies do not update their labor burden rate often enough. If you think your 30% burden rate from 5 years ago is still accurate, our advice is to revisit it. Health insurance increases alone may throw off the budget. On your job estimates, the burden rate should be included with wages for an overall labor cost.

“I am baffled by companies who put out bids without taking accurate labor burden costs into consideration,” mentions Construction Team Lead, Ian Grimbleby. “Your ‘contingency’ line or cost buffer for estimates should not be used as a replacement for labor burden."

Crunch the Numbers!

Crunching the numbers is what we do best at Grimbleby Coleman. Our clients ask us routinely to review their burden rates annually to make sure they are not omitting anything. As trusted profit advisors, it’s our job to help clients decipher a direct cost versus an indirect cost, and create a percentage that is profitable. We recommend eliminating the risk by simplifying and removing the headache of rehashing the estimate each proposal. Set a percentage that is quick, easy and accurate.

What to do if I’m already in hot water?

One of our clients just found themselves in a position that no company wants to be in. Unfortunately, they neglected to include a labor burden rate in their original estimate, and they lost money on the job. Materials and man-hours were as expected (i.e. actual was close to the job estimate), however, covering materials and payroll in a tight bid situation is not worth the risk – and inevitable cash flow issues result.

We can help you determine your bidding rates by sitting down and helping you understand your actual costs. Although everybody estimates job costs differently – i.e, software programs, spreadsheets – our experts will walk you through all the costs and determine your labor burden so you can calculate bids appropriately and accurately.

Example of a Labor Burden Summary

As you can see from the table below, it’s very easy to lose money quickly without factoring the labor burden into your proposals. In this case, the total labor burden is 52%. So, for every dollar of wages estimated, 52 cents more related to employee costs needs to be added to the job estimate. On a job with estimated wages of $100,000, the total labor line item should be estimated at $152,000 (i.e. $100,000 * 1.52).

200 West Roseburg Avenue
Modesto, CA 95350

(209) 527-4220 (phone)
(209) 527-4247 (fax)

https://www.grimbleby-coleman.com/resources/articles/139

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Our Commitment to Safety and Prevention of COVID-19

Dear friends and clients,

Thank you for putting your trust in us to provide your tax and advisory services. These are rare and unusual circumstances; but be assured, we are committed to providing continued services and support.

To lessen our societal impact, as well as to protect the well-being of you, our clients, and our team, we ask that the majority of our communications be electronic or over the phone.  

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GC looks forward to normalizing our processes as soon as safety dictates. Be well and take care of yourselves, your community, and your loved ones. We are here for you professionally and personally, so do not hesitate to reach out.

All the Best,

Ian Grimbleby, President/CEO and Principal
Grimbleby Coleman CPAs
Certified Public Accountants, Inc.
(209) 527-4220
contactus@gccpas.net

 

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