In the residential construction industry this has to be the most asked question. Whether you are just starting out or have grown your company significantly. Understanding how to properly do this can yield the net profit you are after.

When it comes to taking your business seriously and wanting to scale it correctly you no longer can just go with what Joe down the street is charging or you will be setting yourself up for failure.

What is a labor charge made of?

We break it down to 3 things: average cost of laborer plus burden, overhead recovery rate per hour & profit. In this post we will show you how we help our contractors figure this out!

What is an average cost of a laborer plus burden?

To figure this out very simply you are going to want to take what you pay each employee per hour. For example I have 3 employees I pay: $20, $18, $19 /hr. Next add them up $20+$19+$18 = $57/hr then divide by # of employees: $57/3 = $19/hr

Now to add the “burden part” we will want to account for workers comp, employer taxes, paid vacation & unbillable time (if your guys show up at the shop and you pay them to drive to the site and don’t directly account for drive time in your estimates or if you pay for their lunch break are just some examples of unbillable time)

Depending on where you are at you can expect the $19/hr to actually end up costing you $23/hr or more. The picture below shows how we account for it in our budgeting tool.

Next let’s talk about how to figure out your overhead rate per hour.

In the first picture you can see when we entered our field employees we also entered in how many months and average hours worked per week.

What this gets us is our total billable hours for a season or our production capacity. Remember this for later.

Next we are going to add up all our indirect costs of doing business in the picture below it will show you all the catalogries to account for!

This will give you a total indirect cost for your construction company.

Next we will take the total annual overhead cost and divide by our production capacity to get our overhead rate per hour.

From talking to hundreds of contractors I would say an average healthy range is anywhere from 20-35 $. But it just depends on how you decide to grow and scale your company plus the area you are located.
The last step is to add the average cost of field laborer + the overhead rate per hour together to get your actual cost of a field laborer per hour on site. Now we want to take this number and apply profit it so lets say our number added up to $60/hr and we want a 30% profit margin on a labor hour. $60 x 1.30 = $78/hr.

If you follow these steps this is how you can accurately calculate a profitable labor charge for your company. And if you would like the budget tool that I just showed you feel free to reach out to us we would be happy to send it!

The ZevBit Team