Job Costing
Jul 3, 2024

Calculating a Burdened Rate for Estimating Labor Costs

Calculating a Burdened Rate for Estimating Labor Costs

When working with companies on job costing we often encounter confusion over the role of the fully burdened rate. This rate is a critical part of both estimation and job costing so it is important to understand and use properly. The burdened rate is used when you are building an estimate. Using a burdened rate ensures that your estimate is based on the true labor cost for the work. So what is the burdened rate? 

Simply, the burdened rate is the full cost for an employee for an hour of work. The base of the calculation is the hourly rate for that employee. But an employee’s hourly pay rate does not account for the full cost of their work. There are many other costs that should be taken into account. Calculating an hourly equivalent for these additional costs and then adding them to the base pay rate creates the burdened rate. 

Calculating other costs to include in the burdened rate

Since the objective of the burdened rate is to derive an hourly rate that best approximates the full cost of an hour of labor for each of your employees it is best to try to account for as many of the additional costs of an employee as possible. Let’s go through a few of these additional costs to help you get started but it will be important for you to take into account the complexities of your business. Each business has its own unique cost that should be included in the burdened rate. 

Here is a list of additional costs you might include in your burdened rate calculation to get you started: 

  • Employer Taxes - Include all of the employer employment taxes for your location(s)
  • Benefits - If you pay for or match an employee’s benefits such as health insurance
  • Bonus or Commissions - Do you regularly pay bonuses or commissions that are related to the work performed? If they are not directly related to the work performed then you should not include them in the burdened rate and account for them as an overhead expense. 
  • Work performance expenses - Do you cover work related expenses such as cell phone stipend, equipment purchases, vehicle expenses like gas or mileage, or other expenses? 

To be included in the burdened rate the costs must be converted into cost per hour. The best way to do this calculation is to convert the costs into an amount per year and then divide by the number of hours your employee can be expected to work in a year. For instance, you will generally pay your benefits on a monthly basis. Take the cost per month and multiply by 12 to calculate the amount per year. Then divide by the number of expected hour to be worked by this employee per year. 

But how many hours does an employee work?

Holidays, vacation, sick days, and office meetings, these all reduce the number of hours your employees spend on a project. As noted above, to calculate the hourly rate for many of the costs included in the burdened rate it is necessary to divide a cost by the average number of hours in a defined period of time. 

Figuring out how many hours your employees actually work in an average week or month is important if you want an accurate burdened rate. Follow these steps to calculate the average hours for different work periods (weekly, monthly, etc). 

  1. Start with your definition of a day. Is a typical day 8 hours?
  2. Next determine the number of work days in the year. Remember to account for variation between years but generally there are 260 work days in a year. Thanks to January 1st being a Monday,there are actually 262 in 2024. 
  3. Now subtract holidays. There are 11 federal holidays but not every company takes all of them. We are now at 251. 
  4. Now subtract the PTO you offer. If you provide 2 weeks of PTO that is 10 days. Subtract from 251  and we are now at 241 as the total working days in 2024. 
  5. Now multiply the calculated number of days by hours per day and that is your total hours for the year [ 241 x 8 = 1,928 ]
  6. Also, let’s account for non-working time. Employees engage in a number of activities that are not part of the work on a job or project. For example training or office meetings, or even birthday celebrations. These activities add up so it is important to account for them. A good number for these activities is between 300 and 500 hours per year. Let’s use 375. Now subtract those hours from the total above to get the total regular working hours for the year [ 1,928 - 375 = 1,553 ] 

Finally,we need to account for overtime. Many of your hourly employees will work overtime and the amount will vary from employee to employee. This needs to be accounted for both in the calculation of the base rate and in the total hours used for calculating the hourly rate for the additional labor expenses. Overtime only applies to working weeks so use the following steps to account for overtime. 

  1. Based on the past history of this employee, how many overtime hours do they typically book in a working week? Let’s use 5 hours. 
  2. Next let’s figure out how many full weeks there are in the year since a week that includes a holiday will not typically include overtime hours since the holiday hours do not count toward the overtime limit of 40 hours per week. With 11 federal holidays and 2 weeks of PTO that makes 13 weeks. 
  3.  Subtract that from the total weeks in a year, 52, and there are 39 full work weeks in a year. 
  4. Now multiply the average overtime for the employee by the number of full working weeks to calculate the additional overtime hours to include in the annual hours. [ 5 x 39 = 195 ]
  5. Now we add these hours to our total from above to get the total working hours including overtime per year  [ 1,553 + 195 = 1748 ]

For the purposes of our burdened rate calculation we will use 1,748 hours as the total work hours for this employee. Remember, this is just an example. You will need to do your own calculations to determine the number of work hours per year for each of your employees. 

Do not forget to blend

As seen above the burdened rate varies from employee to employee. And since you will never be sure which employee will be working a specific job when building your estimate you should use a rate that is a blend of the individual rates. The simplest way to blend your burdened rates is to take all of the burdened rates from all of the employees that perform the same work (ex. all of your electricians) and calculate the average burdened rate. 

And adjust for overtime

The foundation of the burdened rate calculation is the base pay rate. This base rate should be adjusted to account for overtime otherwise the rate will not account for the true hourly cost. Luckily, all the work we did above makes this relatively easy. We calculated the total annual working regular hours and the overtime hours per year. This provides a ratio of overtime hours to regular hours. 195 overtime hours / 1553 regular hours = .126 or just slightly more than an 1/8th. So roughly 1/8th of all hours worked will be overtime. 

Our goal is to calculate a base rate that takes this into account. So, let’s start with the base rate. For an example we will say that our base rate is $25. That means our overtime rate will be $25 * 1.5 = $37.5. Now, if .126 of every hour is overtime, that means that .874 of every hour is regular wage. It’s just math now. 

$25 x .874 = $21.85 which is the regular wage portion

$37.5 x .126 = $4.725 which is the overtime portion for every hour

Add them together and the properly adjusted rate is $26.575 or a difference of $1.575 when compared to just using the regular rate. 

In this example, $26.575 should be used as the base rate. Add to this the hourly equivalent of all of the additional costs calculated above. This total then becomes your fully burdened rate. Calculate the burden rate for all employees and then group your employees by the type of work then perform and blend them. This blended burdened rate then becomes the rate to use during the calculation of labor costs for estimation. 

Being able to create accurate estimates for projects has a number of benefits. The most obvious benefit is to help you avoid underbidding projects. Underbidding leads to an increase in change orders and undermines the relationship with the customer. In extreme cases the customer will perceive that they have been lied to or cheated. This perception has a ripple effect that can impact your brand and reputation. 

The other benefit is to improve the sales process. When your salespeople have a clear and accurate understanding of the costs of projects they are able to properly set the customer's expectations at the beginning of the sales process. This clarity and confidence in the accuracy of bids helps you avoid projects that are unprofitable ensuring future growth.