Ask ten contractors what their lead carpenter costs them per hour, and nine will quote the wage. The tenth, usually the one still in business after a decade, knows the real number is 35 to 60 percent higher. That gap between wage and true cost is called labor burden, and ignoring it is how profitable-looking jobs quietly bleed out before the final invoice clears.

Labor is the biggest variable on most residential and light commercial jobs. When you misprice it, you don’t just shave a few points off margin — you sometimes flip the entire job from profitable to a loss. This guide walks through how to calculate burden rate the way a controller would, where contractors typically get it wrong, and how to bake it into your estimates so every hour billed actually covers what it costs.

What Labor Burden Actually Includes

Labor burden is everything you spend to keep an employee on the payroll beyond their base wage. It’s the difference between “Mike makes $30 an hour” and “Mike costs the company $44 an hour to have on a jobsite.” The components are unglamorous but predictable:

  • Payroll taxes — FICA (7.65%), FUTA, and SUTA. Together usually 8 to 10 percent of gross wages depending on state unemployment rates.
  • Workers’ comp insurance — varies wildly by trade. Framing and roofing can hit 15 to 30 percent of payroll. Finish carpentry might be 6 to 9 percent.
  • General liability allocation — the portion of your GL premium attributable to payroll-based exposure.
  • Health insurance and benefits — if you offer them. Even a modest plan adds $400 to $900 per employee per month.
  • Paid time off — vacation, holidays, sick days. Wages paid for hours not billable to a job.
  • Retirement contributions — 401(k) matches, SEP-IRA contributions.
  • Training, certifications, PPE, uniforms, and small tools — often overlooked but real.
  • Vehicle and fuel allocations — if the truck is tied to the worker, not the job.

Some of these are obvious. The killers are the indirect costs — paid holidays, training time, that Tuesday morning your foreman spent at the supply house instead of on site. They’re real labor hours you paid for that produced zero billable output.

The Burden Rate Formula That Actually Works

Most contractors who try to calculate burden do it wrong because they divide total labor cost by total hours worked. That undercounts the problem. The correct denominator is billable hours, not paid hours.

Here’s the framework:

  1. Start with annual gross wages for the employee.
  2. Add every burden component from the list above. This is your fully-loaded annual labor cost.
  3. Calculate billable hours: 2,080 annual hours minus PTO, holidays, training, sick days, and a realistic non-billable allowance (drive time between jobs, supply runs, equipment maintenance, jobsite cleanup that wasn’t budgeted).
  4. Divide fully-loaded cost by billable hours. That’s your true hourly cost.

A worked example. Carpenter at $30/hour, 2,080 paid hours = $62,400 base wages. Add 9% payroll taxes ($5,616), 12% workers’ comp ($7,488), $8,400 health insurance, $2,500 vehicle allocation, $1,200 tools/PPE/training. Fully loaded: $87,604.

Billable hours: 2,080 minus 80 hours PTO, 64 holiday hours, 40 sick, 60 training, 200 non-billable drive/supply/cleanup = 1,636 billable hours.

True hourly cost: $87,604 ÷ 1,636 = $53.55 per hour. That’s an 78% burden over the $30 wage. The contractor who bid that carpenter at $30 plus 20% markup ($36/hr to the customer) was losing $17 every hour Mike turned a screw.

If your spread between wage and billed rate is less than 60 percent, you’re probably not covering burden, let alone profit. The math doesn’t care how busy you are.

Why “Industry Average” Burden Rates Are Dangerous

You’ll find articles claiming labor burden runs 25 to 30 percent for construction. Those numbers are wage-only burden in low-cost states with no benefits offered. Real fully-loaded burden for a contractor offering health insurance and operating in a high workers’-comp state regularly hits 65 to 90 percent.

The variance comes from three places:

  • Trade classification — a roofer’s comp rate can be triple a cabinet installer’s. Same wage, very different cost.
  • Benefits philosophy — offering health insurance and 401(k) match easily adds 15 percentage points.
  • Productivity assumptions — a crew with 1,800 billable hours has dramatically lower per-hour burden than one with 1,500, even at identical wages.

Calculate yours from your own books. Pull last year’s P&L, your workers’ comp audit, your payroll register. Don’t use a generic multiplier you found online — the variance between your business and the average is exactly where the money leaks.

Tracking Billable vs Non-Billable Hours

The burden formula falls apart if you don’t actually know how many hours hit jobs versus the shop. Most small contractors guess, and the guesses skew optimistic. You think your crew is 85% billable. The reality is 75%.

That 10-point gap means your burden rate is 13% higher than you assumed, which means your bids are 13% too low on the labor line. On a job with $40,000 of labor, that’s $5,200 of margin you priced away because the spreadsheet was lying to you.

Time tracking has to capture which job each hour belongs to, including the “between jobs” categories. Apps like TrestleBook let you log crew hours against specific projects and separate billable work from drive time and shop time. Even simple discipline — foreman writes down clock-in, clock-out, and project name — will surface the leak. Most contractors who track this honestly for one quarter find their billable percentage 8 to 15 points lower than they assumed.

Ready to put this into practice? Download TrestleBook Free — it’s free and works offline.

How Burden Rate Changes Your Bidding

Once you have a real burden rate, two things should happen to your estimating process.

First, you bid labor at fully-loaded cost, not wages. Every hour of estimated work gets priced at the burdened rate, then marked up for overhead and profit. If you skip this and apply markup to raw wages, you’re double-discounting yourself.

Second, you stop comparing yourself to lowball competitors who quote near-wage rates. Those contractors are either undercounting burden (and slowly going broke) or paying cash off the books (and one audit away from disaster). Their pricing isn’t a benchmark — it’s a warning.

The bid you lost to a guy charging $45/hour all-in wasn’t lost. He took your problem off your plate and put it on his own ledger.

A practical bidding adjustment: build your estimate in three layers. Raw labor hours × burdened rate = direct labor cost. Add materials, equipment, subs. Apply overhead recovery (your shop’s annual fixed costs divided by expected billable hours). Then apply profit margin. The contractors who survive recessions are the ones whose overhead and burden are dialed in — they know exactly what number puts them in the red and refuse to bid below it.

Updating Burden Rate as Your Business Changes

Burden isn’t a one-time calculation. Recalculate at minimum annually, and after any of these triggers:

  • Workers’ comp audit results — if your experience modifier changes, so does your effective rate.
  • Health insurance renewal — premiums rarely go down.
  • Wage adjustments — raises ripple through payroll taxes and benefits.
  • Crew composition shifts — adding a $20/hour helper changes your blended burden meaningfully.
  • Productivity changes — if billable percentage drops, recalculate immediately.

Keep a simple spreadsheet with one row per employee or per labor class (helper, journeyman, lead, foreman). Update quarterly with actual data, not assumptions. The contractors I’ve seen recover from years of underbidding all share one habit: they treat burden rate as a living number, not a stake in the ground.

Burden in Other Trades and Service Businesses

The burden problem isn’t unique to construction. Any business that bills out time has a version of it. Solo operators and freelancers face the same math — their “hourly rate” needs to cover self-employment tax, health insurance, retirement, equipment, and the 30 to 40 percent of work hours spent on admin and business development that aren’t billable. Tools like Stintly help freelancers and self-employed operators track that split so they price their work to cover everything, not just the visible hours.

Landlords and property managers have an analogous problem: the “rent minus mortgage” math ignores vacancy, maintenance reserves, capex amortization, and management time. Apps like KeyLoft exist specifically to track the real cost side of rental operations, the same way labor burden tracks the real cost of a crew. Different industry, identical mistake — pricing off the gross instead of the loaded number.

Common Burden Calculation Mistakes

A few traps that catch even experienced contractors:

  • Forgetting owner’s pay — if you swing a hammer, your time has burden too. Pay yourself a market wage, burden it, and bill it. Don’t pretend owner labor is free.
  • Mixing direct and indirect labor — your office manager isn’t labor burden, she’s overhead. Don’t double-count.
  • Using last year’s comp rate — if you had a claim, your mod factor jumped and you didn’t notice.
  • Counting overtime as straight time — OT premium hours have a different burden ratio because taxes apply to the premium too.
  • Ignoring the 2,080-hour assumption — that number assumes 40 hours every week of the year. Almost no employee actually hits it.
If your burden rate calculation feels too clean, you’ve probably left something out. Real numbers are ugly. The carpenter who costs $87,604 a year to keep working never produces a round number.

TrestleBook’s job costing reports let you compare estimated labor cost to actual hours logged, which is where burden leaks become visible. A job that came in 6% over on labor hours, with a fully-loaded $54/hour rate, just lost three points of margin you can’t recover. Catching that on job five means job six gets priced correctly.

The Bottom Line

Labor burden is the most underestimated number in small contracting. Get it wrong by 15 percentage points — which is typical — and you can run a busy, well-reviewed business straight into insolvency. Get it right, and you finally understand why some shops with worse marketing somehow have nicer trucks and pay better.

Pull your books this week. Calculate one burden rate, for your most common labor class. Compare it to what your estimates assume. The gap between those two numbers is the conversation you need to have with yourself before you write another bid.