Updated: May 7, 2020
I read a recent article in Construction Business Owner Magazine called “9 Tips to Maximize Your Company's Profit Potential.” The #1 tip on the list is Get An Accurate Labor Burden Rate, and the author goes on to say “Good estimating starts with accurate labor rates….”
Makes sense. In order for a company (construction in particular) to generate good estimates, properly determine it’s billing rate, and set itself up for success it must have an accurate labor burden rate.
These figures may be dated since I’m not a construction professional, but I’ve heard that, depending on the trade, the indirect costs of labor can be in the 25 – 35% range for a non-union contractor and from 60 – 70% for a union contractor.
This is not an exhaustive list of indirect labor costs, but when I consider these costs one thing jumps out at me:
· Workers' compensation
· General liability
· Other payroll based insurance (garage liability, umbrella, etc)
· Employee benefits
· Payroll taxes (FICA, FUTA, SUTA)
That one thing is that there isn’t much you can do to reduce these costs or your labor burden rate right now except for one item; worker’s compensation insurance.
You can’t do anything about, for example, unemployment taxes. And, you can’t do much about insurance in general until you come up for renewals. Even then, unless you decide to run an RFP or take your account out to market, your rates could remain the same or increase.
However, there’s one exception. Workers’ comp, which could be for many the single largest
indirect cost in your labor burden rate, is fraught with errors. Having audited work comp programs for 20 years, I know first hand that there can be any number of existing, expensive errors that increase your premiums and, in turn, your labor burden rate.
I’ve heard of contractors modifying their labor burden rate for bidding purposes and not using their experience mod when the rate was over a 1.00. The thinking is that “if half of the companies bidding have a mod below average (below a 1.00) and ours is above, we won’t be competitive using our mod and true labor burden rate.”
This could be an unnecessary dilemma considering the number of experience rating errors I see every year with mods that are both above and below 1.00. But, that contractor with an artificially high experience mod gets hit by the double blow of both higher premiums and reduced sales competitiveness.
I highly recommend using an independent auditor whose expertise is work comp. Our pricing model is value-based, so, you won’t pay anything for our time or expertise. Only a percentage of the value we deliver you. However, if you don’t choose Cytron Group LLC, I still advise you to find an independent auditor to help keep your overhead and your labor burden rate as low as possible.