Labour Burden Rate: What Each Employee Really Costs a Trades Firm

A labour burden rate is everything an employee costs beyond their wage, expressed as a percentage of wages or, better, as a cost for each hour you can actually bill. A small trades firm builds it from payroll: wages, employer taxes, insurance, benefits, training and paid time that earns nothing, divided by productive hours.

Most owners price labour at the wage on the payslip, plus a rough uplift they heard somewhere. The gap between that and the true figure is where profit disappears. Below, two employees are costed line by line from invented but realistic payroll, so you can see how a $28 wage becomes a $45.86 cost for each productive hour. Then the same sheet is built for your own people.

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The five blocks that make up the burden

Burden is not one number you look up. It is five groups of costs, each from a different record you already hold.

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1. Wages and paid time. The gross pay for all hours paid, including holidays, sick days and public holidays. This is the base.
2. Employer payroll taxes and statutory contributions. The employer's share, which appears on payroll reports. Rates and thresholds differ by where you operate, and they change, so read this from your payroll provider's report, not from memory.
3. Insurance. Workers' compensation or employer's liability, and the share of general liability that follows headcount or payroll. Trades carry much higher insurance rates than office work, and the rate depends on the trade's risk class.
4. Benefits. Health contributions, pension or retirement matching, paid training days, and any allowance you pay.
5. Employee-specific costs. Personal protective equipment, licences and certifications, tools you issue, uniforms and training fees.

Then comes the step that changes the answer most: converting the annual total into a cost per productive hour. Not every paid hour is billable, and the hours that are not still have to be recovered from the ones that are.

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A worked sheet for an experienced journeyman

An illustration with invented figures. A journeyman is paid $28 an hour for 2,080 hours a year (40 hours for 52 weeks), so annual wages are $58,240. The following table builds the burden from a payroll report and an insurance schedule. Replace each line with your own records.

The burden as a percentage of wages is 18,248 / 58,240 = 31.3 per cent. That is the figure people usually quote, and it is useful for a quick uplift. But it is not the number to price with, because it ignores the second half of the sum.

From annual cost to cost per productive hour

The firm pays for 2,080 hours but cannot bill them all. Start by removing paid time off the tools: say 10 days of holiday, 8 public holidays and 5 sick days, which is 23 days or 184 hours. That leaves 1,896 working hours. Then allow for unbillable working time: travel between jobs, waiting for materials, tool-box talks, quoting visits and clearing up. If your own timesheets show about 12 per cent of working hours are unbillable, productive hours are 1,896 x 0.88 = 1,668.

The cost per productive hour is $76,488 / 1,668 = $45.86. Against the $28 wage that is a multiple of about 1.64. If this firm had priced labour at $28 plus the usual quick uplift of 31 per cent ($36.68), it would be recovering $9.18 too little for every productive hour. Over the 1,668 hours that is about $15,300 a year of cost not charged, for one employee, before any overhead or profit is added.

The same sheet for an apprentice

An apprentice shows how the rate changes with the person. Assume $18 an hour for 2,080 hours, so wages are $37,440, and use the same payroll tax and insurance percentages. The differences: no health or retirement contribution yet, higher training cost, and lower productive hours because more time goes on supervised learning.

The burden is 28.0 per cent of wages. After the same 184 hours of paid time off, the apprentice has 1,896 working hours, and if 20 per cent of those are unbillable because of supervision and learning, productive hours are about 1,517. The cost per productive hour is $47,905 / 1,517 = $31.58, against an $18 wage. The ratio is about 1.75, higher than the journeyman's, even though the percentage burden is lower. That is the usual surprise: a low percentage can hide a large unbillable share. It does not make an apprentice a bad investment; it explains why the rate you charge for their hours should be set deliberately, and whether the training time is partly paid by a programme or grant that you should check for.

Notice also that none of this is a statement about what you should pay anyone. It is a statement of what the hours cost.

Where the numbers come from in your own business

You do not need to estimate anything the firm already records. Each block has a home.

• Wages and paid time: the payroll report for the last 12 months for each person, including holiday pay.
• Payroll taxes: the same payroll report, usually shown as employer contributions. If you are unsure which items are employer-side, ask your payroll provider or accountant.
• Insurance: your policy schedules; workers' compensation is often calculated on payroll by job classification, and an audit at renewal can change the figure. A job category on a different risk class changes the cost for that person.
• Benefits: the invoices or statements from your providers.
• Unbillable time: timesheets, or a job management app's reports, comparing hours on jobs with hours paid.

The unbillable share is the one most firms have never measured. If you do not track it, take two weeks of timesheets with a column for "on a job" and "not on a job", and use that as your first estimate. Rerun it each quarter. A firm that cuts unbillable time from 12 to 9 per cent has raised productive hours for each person without hiring anybody.

A four-person firm and its blended rate

Most small firms need both a rate per person and a blended rate for quoting when you do not yet know who will do the job. An illustration: the firm has two journeymen, one apprentice and one labourer. Using invented annual figures, the cost per productive hour and productive hours are:

The blended figure is the team's total employment cost divided by its total productive hours: $254,586 / 6,553 = $38.85. Compute it from the two totals, never by averaging the individual rates, because a simple average ignores that some people supply more hours than others. The sum of costs is $76,488 + $76,488 + $47,905 + $53,705 and the sum of hours is 1,668 + 1,668 + 1,517 + 1,700.

The blended rate is most useful for early quotes, where the crew is not set. When the crew is known, use the individual rates, since a job done mostly by the apprentice has a different cost to one done by two journeymen.

How downtime changes the picture by season

Trades firms rarely have a flat year. A roofer in a wet month, a landscaper in winter and an electrician between large projects all have weeks when paid hours exceed billable ones. The annual figure averages this out, but your cash does not.

An example: a crew of three has 12 per cent unbillable time across the year, but in the quietest quarter it is 30 per cent. If you quote winter work using the annual 12 per cent, those jobs earn less than your sheet says. Two practical responses exist. One is to keep a seasonal rate and quote with it in the quiet months, so the winter jobs carry the cost of idle time. The other is to fill the gap with work that is billable at a lower margin, since a job that recovers its direct cost and part of the burden beats paying a crew to wait. Either choice is made deliberately when you know the figures, and by accident when you do not.

Before and after: one quote re-priced

Take a small job estimated at 24 hours of journeyman labour. Priced the old way at wage plus 25 per cent, the labour line is 24 x $28 x 1.25 = $840. Priced from the burdened cost per productive hour with overhead and margin, using the invented $74.83 charge-out rate worked out in the pricing section below, the labour line is 24 x $74.83 = $1,796. The difference of $956 is not a price rise to a customer, it is the labour cost, overhead and profit the first figure never covered. Materials are separate and unchanged. If a competitor is quoting near $840, they are either far cheaper to run than you or about to find out what their rate really is.

A third example shows why small errors compound. Suppose the unbillable share is understated by three points, 9 per cent instead of 12. Productive hours become 1,896 x 0.91 = 1,725, and the cost per productive hour falls from $45.86 to $44.34. On 1,668 real productive hours that is $2,500 a year, per person, of cost nobody noticed. For a six-person crew, $15,000 a year. This is why measuring the unbillable share is worth a fortnight of timesheets.

Using a spreadsheet and an AI assistant to keep it current

This is a spreadsheet job. One row per employee, one column per cost line, one column for productive hours, and one for cost per productive hour, which is the sum of cost columns divided by the hours. An AI assistant helps in two modest ways: building the sheet and checking it. Neither involves sending names to a chat tool. Use role titles such as "journeyman 1" and "apprentice".

Build a spreadsheet layout for a labour burden calculation. One row per employee (by role, not name).
Columns: hourly wage, paid hours per year, annual wages, payroll tax %, workers' comp %,
general liability share, health contribution, retirement match %, training, tools and PPE,
total burden, burden % of wages, paid holiday and sickness hours, unbillable % of working hours,
productive hours, cost per productive hour.
Give me the formulas for row 2, assuming data starts in column A.

A realistic output includes the formulas such as annual wages equal to hourly wage times paid hours, and cost per productive hour equal to total employment cost divided by productive hours, where productive hours equal (paid hours minus time-off hours) times (1 minus unbillable per cent). What you would check: that the formula divides by productive hours, not paid hours; that percentages are held as true percentages and not whole numbers; and that the total includes wages. These are the three commonest errors in a generated sheet. For a general walk-through of formulas with an assistant, see the older tutorial on using ChatGPT with Excel.

Checking your sheet with the two examples

Once the sheet is built, enter the journeyman figures from above. If your sheet does not return a total employment cost of about $76,488 and a cost per productive hour of about $45.86, the formulas are wrong. Use the known answer as a test. Then replace the figures with your own. This is a simple way to protect against a silent spreadsheet error, and it takes two minutes.

Turning the rate into prices

The cost per productive hour is a floor, not a price. Shared overhead (office staff, premises, vehicles, software, accountancy) and profit come on top. A simple approach: add up annual overhead, divide by total productive hours across all field staff to get an overhead cost per productive hour, add it to the burdened cost, then apply your margin. Take the invented journeyman: if overhead came to $14 per productive hour across the firm, the cost is $59.86, and a margin of 20 per cent on price (divide by 0.8) gives a charge-out rate of about $74.83 an hour.

That is roughly 2.7 times the wage, which can look alarming next to a customer's own $28 benchmark, and it is entirely ordinary. It also shows why trades firms that price at wage plus a flat uplift struggle. The tutorial on working out a tradesman's hourly rate without guessing takes the same cost through to a published rate. For examples of building prices from a labour cost, see the tutorials on pricing commercial window cleaning per pane and on an itemised landscaping estimate, both of which assume you know your cost per hour.

Five mistakes that distort the burden

1. Dividing by paid hours. It understates the cost per billable hour by the share of paid time off and unbillable work. The journeyman above would show $36.77 ($76,488 / 2,080) instead of $45.86.
2. Counting holiday pay twice. If your wages figure already includes paid holidays, do not add holiday cost as a separate burden line. Subtract the hours from productive time instead.
3. Using an old insurance rate. Workers' compensation is revised at renewal, and an audit may bill extra for last year. Update the line when the policy changes.
4. Applying one rate to everyone. The journeyman is 31 per cent and the apprentice 28 per cent, but the cost per productive hour differs sharply. Build one row per role at least.
5. Leaving out the owner. If an owner works on jobs, cost their hours at a market wage. If you do not, your quotes assume free labour.

The firm that won every quote and lost money

Picture a small firm that priced every job at wage plus 25 per cent and kept winning work, which felt like success. At year end the accountant showed that labour had cost more than the labour revenue billed, because paid holidays, sickness and travel had never been recovered. The firm rebuilt its rate from payroll, found the true cost per productive hour was well over one and a half times the wage, raised quotes in steps and lost the lowest-priced third of its enquiries while its profit recovered. The lesson is that winning every quote is a warning sign, not a result.

A yearly routine

1. Pull the payroll report, insurance schedules and benefit statements once a year, or whenever one changes.
2. Update the sheet by role, then check it with the two worked examples as a formula test.
3. Measure unbillable time for two weeks every quarter.
4. Recalculate your charge-out rate and compare it with what your quotes actually assume.
5. Ask your accountant or payroll adviser to review the sheet once, particularly the payroll tax and insurance lines, since they know what applies to your business.

The same cost per hour feeds everything else you price, including whether an AI subscription that saves an hour a week pays for itself. An electrician checking labour hours on a bid needs it to turn hours into money. A lawn care crew testing whether a new customer pays needs it for the per-stop profit test. If you want help wiring this into your quoting, that is what my AI implementation consultation covers; the contact page is the place to start.

Labour burden questions from small trades firms

Is the burden rate a percentage or a dollar figure?

Both are used. As a percentage it is the extra cost on top of wages, which is handy for quick pricing. As a cost per productive hour it is what you must recover from each hour you can actually bill. Use the hourly figure for quotes, because it includes the hours you pay but cannot bill.

Do I include van and tool costs in the burden?

Keep it simple: put costs that belong to one person, such as personal protective equipment and training, in the burden, and keep shared costs, such as vehicles, premises and software, in overhead. Whatever you choose, apply it consistently, or you will count some costs twice.

How often should I recalculate?

At least once a year, when insurance renews, and whenever wages, benefits or payroll tax rates change. A step change in any one of them can move the rate by several points, and your quotes carry the old figure until you update it.

Should owners be included?

Include an owner who works on jobs at a market wage for the work they do. Otherwise your profit is quietly paying for unpaid labour, and your quotes look healthier than the business is.

Further reads

• How to Build a Job Costing Sheet in Excel With AI Help — A job costing sheet that uses your burdened hourly cost.
• Construction Job Costing With AI: Find Which Jobs Actually Made Money — Find which finished jobs actually covered their labour.
• Contractor Insurance Renewal: Gather the Figures Before Your Broker Calls — Gather payroll and insurance figures before renewal.
• Apprentice Off-the-Job Training Log: What to Record and How AI Helps — Record the apprentice training time this sheet treats as unbillable.
• Plumbing Price Increase Letter: Raise Call-Out and Hourly Rates Clearly — Telling customers when a new rate means higher prices.
• Restaurant Labour Cost Percentage: Test Rota Changes With AI First — Labour cost as a percentage in a different sector.
• Salon Commission or Booth Rent? Model Both on Your Numbers With AI — Work out the break-even rent for a salon chair at three occupancy levels, build the sheet with ChatGPT and check employment status first.
• Apprentice Training Plan for Trades Firms: Sign-Offs and Reviews With AI — A skills matrix, four-stage sign-offs and a weekly review sheet for a small trades firm, with AI drafting the paperwork and the owner signing.
• How to Price Building Work: Check Your Rates Against Past Jobs With AI — Compare quoted and actual cost line by line on past jobs, find what you underprice, and turn it into a rate sheet you test before quoting.
• How to Price Christmas Light Installation: Roofline, Trees and Take-Down — A worked quote with roofline, two trees and take-down as separate priced lines, the cost behind each rate, and an AI check of the sheet.
• Plumbing Flat-Rate Pricing: A Worked 30-Task Price List Built With AI — A small plumbing firm's 30 most-quoted tasks priced from labour minutes and parts, margin-checked and tested against time-and-materials on three jobs.
• AI Tools and AI Development: The Complete 2026 Guide — the AI hub, including every tutorial in the AI-for-business series.

Sources: payroll, insurance and benefits records you hold, and general costing practice. Rates, percentages and wages in the examples are illustrative; use your own payroll figures and ask an accountant or payroll adviser about your obligations.