If you are the owner of a small business that generates its revenue through hourly billing, then you must understand your fully burdened labor costs in order to survive. The first thing you need to know is that your employees fall into two categories, namely direct employees and indirect employees.
Direct employees are those workers on the job site who bill their efforts at an hourly rate. They are the direct source of your company’s revenue.
Indirect employees support but are not directly involved on the job site. Examples are administrative positions such as purchasing, bookkeeping, accounting, and marketing.
In order for a contracting business, for example, to properly determine its billing rate for direct employees, it must first establish its labor burden rate, followed by the fully-burdened labor costs per hour worked. This can be extremely complicated but is vitally important to the success of your company, since your billing rate will determine whether your business is profitable, or whether you lose money every time you do a job. You billing rate is too critical to simply guess. Luckily, a Burdened Labor Costing Tool can take the guess work out of this process.
Labor burden rate is the total indirect costs as a percentage of the company’s direct labor. For every dollar of direct labor allocated, apply labor burden as a percentage of the direct labor. Break costs down into direct and indirect costs. Known expenditures directly associated with the project are direct costs. These include direct labor, materials and supplies, equipment rentals, bonds, and permits. These costs are obvious inclusions for job estimates. The indirect costs are not so obvious.
Indirect costs that need to be included in any job estimate include workers’ compensation, general liability and automobile insurance, motor vehicle and equipment repairs and maintenance, depreciation, employee benefits such as health, life, disability, profit sharing, bonuses and 401(k) match, and payroll taxes. It is also necessary to account for vacation time, holidays, sick days, training, and safety.
A Burdened Labor Costing Tool can track all direct labor costs in detail. It calculates burdened labor as the sum of direct labor (vehicle) costs including but not limited to payroll taxes, worker’s comp, benefits, and an adjusted percentage of your indirect labor and overhead costs. It then reports on these specific costs that tie directly to each direct employee. You can use the information to set flat-rate pricing, time-and-material pricing, job quotes, and labor estimates. The result is a clear understanding of the critical data needed for effective business decision making.
If you would like to talk about burdened labor costs, or if you have general questions about bookkeeping, please call 262-563-9266 or email .
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