Labor Burden Rate: The 1 Action You Can Take Right Now To Reduce Your Labor Burden
- Stuart Cytron
- May 5, 2020
- 5 min read
Updated: Jul 9, 2024
Below:
Before diving right into reducing your Labor Burden Rate, I want mention briefly what I read that indicated to me just how important this is to your company's financial health and profitability.
No. 1 Tip to Maximize Profit: Labor Burden Rate
I read a recent article in Construction Business Owner Magazine called “9 Tips to Maximize Your Company's Profit Potential.” The number 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. You could be courting disaster if you are bidding and winning projects with mistakenly low Labor Burden Rate estimates. And, on the other hand, you could be losing out on new business (lost revenue) if your rates are too high.
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.
The Burden Of Labor Burden
These figures may be dated since I’m not a construction professional and don't follow this as close as you do. But I’ve heard that, depending on the trade, the indirect costs of labor burden can be in the 25 – 35% range for a non-union contractor and from 60 – 70% for a union contractor.
There are a number of ways to calculate Labor Burden Rate, and you have to use the methodology that best suits your circumstances. So, this is not an exhaustive list of indirect labor costs. But, it is a good one to highlight how I think you can help yourself.
Indirect Labor Costs
· Workers' compensation
· Any other payroll based insurance (possibly general liability, garage liability, umbrella, etc)
· Employee benefits
· Payroll taxes (FICA, FUTA, SUTA)
Labor Burden Rate: Accept What You Can't Control
When I consider these costs one thing jumps out at me: Many are fixed and/or out of your control. You can’t do anything about, for example, unemployment tax rates. And, you can’t do much about insurance in general (outside of workers compensation insurance) 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.
Labor Burden Rate: Change Those Things You Can Control
There is one item, however, that can can focus on to reduce your labor burden rate right now; worker’s compensation insurance.
There is a sequence of workers comp insurance cost reducing strategies that you can implement to dramatically reduce your workers comp premiums. We group these activities by how soon you can see results; now, next renewal, and 2 renewals from now an beyond.
Odds are that you can reduce your workers compensation insurance Cost Per Full Time Employee right now. And, you can definitely reduce work comp insurance premium by your next renewal.
What Is The 1 Action You Can Take Right Now To Reduce Your Labor Burden Rate? Attack Your Workers Compensation Insurance Cost
Reduce Your Workers Comp Cost Per Full Time Employee & Labor Burden Rate: Now
Much of this website is dedicated to our core business; auditing the calculation of workers compensation insurance premiums. We know from decades of experience that most reading this have workers compensation insurance program errors.
And, those errors cause overcharges that both 1) cost you additional premium and 2) inflate your Labor Burden Rate. These errors we can fix now.
There are the common problems related to Experience Modification Rates, payroll auditing, proper classification, and compliance with rating bureau rules that can impact all businesses. In addition, however, we find that construction firms miss industry-specific opportunities to take advantage of separation of payroll rules and apply for various construction credits.
Further Reduce Your Workers Comp Cost Per Full Time Employee & Labor Burden Rate: Next Renewal
No matter when you next renew, that date is within the next 12 months. There are 2 strategies we can start working on now, to benefit you upon your next renewal.
A Reserve Audit. Do you have open claims? We can audit the reserve values on those open claims. Insurance companies can and do "over reserve" claims and those errors increase your Experience Modification Rate. Higher EMRs can not only increase your premiums and your Labor Burden, but also:
Hurt your competitiveness to bid on projects
Hurt your competitiveness at renewal with underwriters causing higher premiums
Take your account to market. You don't have to bid your whole Property & Causualty program. But, at least your workers compensation insurance. Workers comp insurance is unique because it is (or can be) a commodity. The policy is a "contract of adhesion." Or, in other words take it or leave it. Insurance companies present you with the policy contract and you can only choose to sign or not sign. There's no negotiation. The contracts are all the same, and your competitors' contracts are identical to yours. There are no choices in the matter of coverages, exclusions, etc.
Additionally, we are in the age of AI. I can tell you every insurance company's filed workers compensation rates in every state. And, we are not limited to the handful (or less) with whom your broker works. In Missouri, for examples, there are 532 (2024) insurance companies approved to sell workers comp. Why not vigorously price shop your work comp?
Further Reduce Your Workers Comp Cost Per Full Time Employee & Labor Burden Rate: 2 Renewals From Now And Beyond
Just to be clear on timing: your current Experience Modification Rate includes your 3-year claims history. And, that history doesn't include last year's policy experience. Rather, the prior 3 years.
Likewise, this year's claims experience will not appear in your Experience Modification Rate for 2 renewals. If your renewal date is January 1, the claims you experience this year (1/1 through 12/31) will not impact the EMR calculation for your next, Jan 1, rating. This year's claims data will first appear 2 renewals from now.
So, any proactive measures you take now to reduce your number of claims, claim severity, etc. will not impact your Experience Rating immediately. You will start to reap the benefits in 2 renewals; sometime less than 24 months from now.
Early Is Easy
To reduce your workers compensation insurance premiums and, in turn, your labor burden rate you will need to focus on Immediate Post-Accident Response.
Think "early intervention." Handling injuries properly and immediately saves not only money but also improves outcomes for injured workers. This focus is not just on the medical handling of claims, but also proper communication with your adjuster, medical professionals, employees, etc. There are a lot of strategies to positively manage your ImPAR , so, I'm just going to give you one example, Injury Triage, because it's the foundation of a best-in-class workers comp program.
Benefits that Telephonic Injury Triage customers enjoy include:
· Reduced Claims
· Reduced Costs
· Reduced Litigation
· Reduced Experience Modification Rate & Labor Burden Rate
We can discuss various techniques to reduce claims and, ultimately, your Labor Burden during a consultation. But, keep in mind that a comprehensive strategy will have it's own flywheel effect snowballing into better renewals, lower costs and a more competitive Labour Burden Rate.
Stuart Cytron, MBA has been published in trade journals such Construction Forum St. Louis and St. Louis Business Journal among others. You can read more about Stuart and how he developed a passion for helping businesses reduce work comp expenses on his website.
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