Payroll & HR
What is Labor Burden for Trade Contractors in Texas?
Labor burden is an important, often little understood concept for subcontractors in construction. In this article, we explain what labor burden is, why it's important, and how to calculate it.
Nov 11th, 2020
What is Labor Burden?
One mistake contractors make in estimating their labor costs is not properly accounting for labor burden (sometimes referred to simply as "burden").
Labor burden refers to the additional costs associated with employing an individual above and beyond their base payroll. Here's a simple formula:
Total Direct Labor Cost = Payroll + Labor Burden
In predominantly open shop markets like Texas, burden for a specialty subcontractor typically comes out to between 20% and 30% of payroll. To put this in perspective, let's say you run an electrical subcontracting business with 10 full-time electricians on payroll each earning $50,000 per year. Your annual payroll for your skilled workforce is $500,000. Because of labor burden however, you should expect to pay between $600,000 and $650,000 in total direct labor costs!
Importantly, this calculation does not include indirect labor costs, which are also substantial. These include expenses like on-the-job training (OJT) and other in-house workforce development initiatives, HR and administrative staff, recruitment costs, payroll processing and PEO fees, and workforce management and accounting software.
Labor burden is an important concept for construction contractors specifically because labor costs typically account for between 25% and 30% of a contractor's total cost structure. And because the average contractor has relatively thin profit margins in the 2-4% range, properly considering costs can be the difference between making and losing money on a project.
Here's a simple table breaking down the main components of burden:
Let's take a more in depth look at some of the component parts of labor burden for a contractor based in Texas (all percentages used below are percentages of your total payroll).
FICA Tax - 7.65%
Total burden associated with FICA tax in Texas is 7.65% of payroll (this does not include a separate 7.65% that an employer is required to withhold from employee payroll). FICA includes two separate line items - Social Security (6.2%) and Medicare (1.45%).
FICA will be a large part of your total labor burden, but not necessarily the biggest.
Workers Compensation Insurance - 5% to 12%
Workers compensation insurance rates vary trade-to-trade and contractor-to-contractor, but they are a function of two key variables: your employee class code(s) and your business's history of workplace incidents (i.e. accidents resulting in personal injury on the job site).
The higher the risk associated with a trade (or "class code" to use the insurance specific terminology) the higher the insurance premium, and vice versa. Here is a quick breakdown by trade based on our research:
- Premiums for workers in flooring, tiling, painting, electrical, HVAC, and landscaping will range up to 5-7% of payroll.
- Premiums for workers in concrete, rough carpentry, drywall, millwork, trim, siding, and residential windows will range up to 7-10% of payroll.
- Premiums for workers in plumbing, excavation, and masonry will range up to 10%-12% of payroll.
Some especially risky trades like roofing and commercial glaziers will premiums as high as 20% of payroll.
Incident History and Resulting EMR
Separately, every business is given an experience modifier rate (EMR) that is a function of workplace incidents. Businesses begin with a neutral EMR of 1.0. For businesses with a high rate of workplace incidents, their EMR will increase as high as 2.0 resulting in higher workers compensation premiums. For businesses with low rate of workplace accidents, the EMR will decline to as low as 0.2 resulting in lower workers compensation premiums.
In practice, businesses that don't maintain high standards of job site safety will have to project higher workers compensation insurance range into their labor burden estimates.
Unemployment Insurance - 0.1% to 4%
Unemployment insurance is a tax imposed on both the state and federal level and ranges from 0.1 to 4% of payroll depending on your employee turnover (see our article on employee turnover in construction). Unemployment taxes can be divided into State Unemployment Tax Act (SUTA) and Federal Unemployment Tax Act (FUTA).
The Texas Workforce Commission set SUTA for 2020 at between 1.14% and 6.31% of only the first $9,000 in annual payroll for each employee.
Similarly, FUTA in 2020 is 6% on only the first $7,000 in annual payroll for each employee, or a maximum of $420.
Practically speaking, if your business has high employee turnover, you are going to be pushing that 4% of total payroll in labor burden.
Employee Benefits - 0% to 15%+
Employee benefits range drastically from contractor to contractor. Below is an overview of some of the items that may be included:
- Paid holidays, vacation, sick days, other absences - 0 to 9% of payroll
- Employee insurance (life, health, short and long-term disability) - 0 to 12% of payroll
- Retirement and Savings (e.g. 401(k)) - 0 to 10% of payroll
- ESOP / Profit Sharing - 0 to 6% of payroll
- Bonuses - 0 to 2% of payroll
Few contractors tend to push the upper limits of these ranges. However most of the dominant, long standing construction firms in the Texas market have experienced great success by investing heavily in employee benefits in order to retain their best employees.
How does Buildforce help reduce labor burden?
One of the primary reasons contractors partner with Buildforce is to reduce their labor burden, specifically unemployment insurance and workers compensation risk.
Contractors who are constantly hiring and letting go workers tend to run up their unemployment insurance taxes. Instead, contractors who partner with Buildforce allow Buildforce to bring them highly skilled tradesmen temporarily without having to worry about an increase in their unemployment insurance tax.
Similarly, contractors who are desperate to hire tradesmen on short notice may find themselves hiring an employee without proper training who gets hurt or hurts another employee, causing workers compensation insurance rates to skyrocket. Because Buildforce pre-screens all of our tradesmen and places them all on our workers compensation plan, we can get a highly experienced, fully-insured candidate onto your job site fast.
Buildforce helps contractors scale their skilled workforce without increasing their overhead. Our mission is to reduce the cost, risk, and headache associated with finding top-tier construction tradesmen on short notice; temporary or permanent.
We like to say if you can order an Uber ride, you can find the right tradesmen for a project with Buildforce. And even if you can't, we'll teach you.
Buildforce partners with commercial, residential, and industrial contractors big and small. Getting set up to find qualified workers for your next project with Buildforce is free. To get started, book an introductory call with one of our account coordinators today.