Summary — Fully Burdened Labor Rate

Introduction

Looking only at an employee’s hourly wage is a common and costly mistake. The fully burdened labor rate is the true, all-in cost of having a person on your team — and it includes payroll taxes, benefits, paid time off, and a share of overhead like rent and software. Missing these hidden costs is one of the fastest ways to erode profits, even on projects that initially looked profitable.

Main points

What the fully burdened labor rate is

• It’s the total annual cost of an employee, divided by their actual billable hours.
• It turns a visible paycheck into a realistic per-hour cost you can use for pricing, bidding, and forecasting.

Components to include

• Direct labor costs: base wages, overtime, commissions, and bonuses (the most visible portion).
• Indirect labor costs (often overlooked): payroll taxes (FICA, FUTA/SUTA), insurance (health, disability, life), retirement contributions, workers’ comp, paid time off, training, and equipment.
• Overhead costs allocated per employee: rent, utilities, software subscriptions, and non-billable staff salaries.

Typical impacts:

• Direct wages often represent ~60–70% of total compensation.
• Indirect and benefits can add 25–40% (or more) on top of base wages.

Step-by-step calculation

1. Gather actual annual cost data (no guesswork): wages + benefits + payroll taxes + overhead allocation.
2. Sum to find Total Annual Employee Cost. Example: Alex the designer may total $90,000/year after adding all components.
3. Determine realistic billable hours: start from 2,080 and subtract vacation, holidays, sick days, training, meetings, and other non-billable time — often landing nearer to ~1,600–1,800 hours, not 2,080. Example used: 1,700 billable hours.
4. Divide total cost by billable hours: $90,000 / 1,700 = $52.94 per hour (Alex’s fully burdened rate).

Why it matters

• Accurate labor rates let you bid confidently, protect margins, and forecast cash flow.
• Role-specific rates prevent underbidding for senior talent or overcharging for junior staff.
• Enables better strategic decisions: hiring, investment, pricing, and resource allocation.

Common mistakes to avoid

• Ignoring non-billable hours (meetings, training, admin).
• Using outdated data (insurance and tax changes, raises).
• Applying a single overhead rate across all roles — different roles consume resources differently.
• Overlooking regional differences or the complexities of international payroll.

Helpful tools and use cases

• Specialized calculators speed and standardize the work: construction labor burden, flip profit estimator, production time estimator, and design fee estimator can help translate labor rates into reliable bids and project plans.
• Examples and tools mentioned help in industries from contracting and real estate flips to agencies and architecture.

Conclusion

Calculating fully burdened labor rates moves you from guesswork to precision. It reveals where profits leak, enables accurate pricing, and supports sustainable growth. Treat it as a live metric — update annually or whenever major cost changes occur — and prefer role-specific rates over one-size-fits-all averages.

Ready to test whether your current pricing really covers the true cost of labor? Try this challenge: how different would your bids be if every employee’s rate reflected their full burden? https://microestimates.com/blog/fully-burdened-labor-rate