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Comparing labour 'costs' and labour 'burden'

By: Darin Pike - IndustrySearch Writer
12 November, 2014

An accurate understanding of labour costs is essential for any business. Calculations are even more critical for contractors that apply a margin percentage when bidding on work and providing estimates for services.

Some expenses are obvious, such as wages, taxes and insurance. However, true expenses go a bit deeper. It is imperative to have software or an accounting system in place so mark-up reflects the true labour burden an owner must cover.

Overview

There are many items that make up the true labour burden. This will vary based on the company, benefits, insurance expenses and more. However, the following examples can have a significant impact on a worker's hourly rate.

  • Payroll taxes
  • Paid holidays
  • Unemployment taxes
  • Paid vacation
  • Workers' compensation
  • Paid sick leave
  • Superannuation
  • Seminars / training
  • Liability insurance
  • Food and beverages
  • Medical insurance
  • Seasonal parties
  • Bonuses (annual / seasonal / profit sharing etc)
  • Employer-provided tools and equipment

Prevailing wage

There will typically be very little variance in the labour burden for prevailing wage jobs; most expense lines are generally assigned to the job on a fixed percentage.

Some benefits, including holiday, vacation, and sick leave, will vary. The assessment will also differ for rated and non-rated bids.

Overall, the excess labour burden is generally between 20 and 35 percent for production employees. That amount will vary based on workers' compensation rates, and office personnel will also have a lower assessment.

Calculating burden

The general formula for calculating labour burden is fairly simple. Divide the total employee expenses by the number of expected hours worked.

Keep in mind; work hours do not include vacation, holiday, sick leave, and other non-production hours.

Example: An employee with three weeks of vacation, five sick days and 10 paid holidays loses 240 hours of production time. Training or seminar time could be another 30 hours, and one 30-minute production meeting per week could add an additional 23 hours not spent on the job.

A 2,080 hour work year would now allow just 1,787 production hours. Expenses need to be based on that figure, not 2,080.

A worker making $20 per hour will have a total "income" of $41,600 a year. Additional costs on a job (4.75 per cent payroll taxes, 10 per cent workers' comp, 9.5 per cent superannuation, insurance, tools and miscellaneous shop supplies, incentive plan, and on-site snacks and beverages) can add another $16,000 (or more) in costs.

This brings the total labour burden to $57,600. Divided by the production time, the $20 per hour employee costs the employer $32.23 per hour on the job.

Updating calculations

There is a balancing act relative to how frequent labour burden amounts should be adjusted. A general rule of thumb is they should be recalculated whenever there is a material change in an expense line.

A change in insurance or workers' comp rates is the most obvious trigger. An unexpected change on the profit and loss statement would also be a red flag. If labour burden expenses are out-pacing receipts there is a problem that needs to be addressed.

Some companies update calculations on a semi-annual basis, while others do so quarterly. It is theoretically possible to do so annually, correlating to insurance rate renewals and wage reviews, but this generally would not be considered sufficient.

Incentive programs

At times it can be difficult to properly fund incentive plans, particularly if there is a variance in how much is paid. Some companies load their bonus programs with items like vacation pay and medical insurance, but that is generally not a good idea. Those items should be seen as part of the overall compensation program for adequate performance on the job.

Incentive programs should generally be monetary reimbursement for meeting or exceeding well-defined goals. The measurement could be reduced waste or meeting deadlines, for example. The key is the results must be measurable and employees and management need to be able to track performance. After all, incentive pay needs to be tracked and included in the total labour burden.

Be proactive

Expenses change during the course of the year. At times a review after-the-fact isn't sufficient. Stay abreast of upcoming changes so bids can reflect true costs.

A significant increase in insurance costs two months into a six-month project can eat into profits – or worse.

Some companies go so far as to maintain a separate financial account for labour burden payments and expenses. It helps them monitor the accuracy and forces them to fund employee expenses like vacation time.

However, there are also flaws in that system. Vacation or sick time, for example, are funded on a regular basis but withdrawn quite sporadically.

A better system is accounting software that tracks credits and allocates the expense for items as they are earned or accrued, not used. This method will also provide a built-in check-and-balance to ensure management is accurately calculating the total labour burden, not just labour costs.

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