Calculating the True Labor Cost of Each Job

By Katherine Muniz
April 25, 2018

If you’re running a construction business, one of your top priorities is to accurately track your profits per job. Along with materials and equipment, determining labor costs is often one of the biggest expenses to your bottom line. So what is the true cost of labor, and how can it be measured?

The cost of labor per job is complex and varied. The real cost of an employee’s work is very different than the hourly rate you pay them. Below are some of the variables that must be accounted for in calculating labor costs:

Work hours

How many hours do your employees work? Are their hours spent at different job sites, performing different tasks? Knowing the answers to these questions is crucial in accurately billing clients for labor and identifying the true amount of work hours allocated to each job. A good mobile time tracking system equipped with job costing will help you track and allocate time worked per job and makes it easy for your workers to accurately clock in from the field.

Overtime pay, prevailing wages, etc.

Identifying the total number of work hours broken down by each job isn’t your only cost tracking challenge. If an employee is entitled to overtime pay, shift differentials, prevailing wages, and/or any other wage entitlements, verifying at which job they worked when they are owed those additional wages is vital. With the right tools and effective job costing, this can easily be tracked.

Employer taxes

As an employer, you already know that on top of employee wages, you’re also responsible for paying federal and state taxes above their salary. These usually include FICA (Federal Insurance Contributions Act or Medicare and Social Security), FUTA (Federal Unemployment Act), and SUTA (State Unemployment Tax Act). Though these costs are mere percentages of your employee’s earnings, it’s important to factor them into the calculation as well.

Workers’ Comp

Another cost you’re responsible for paying is Workers’ Comp Insurance. WC Insurance premiums are determined based on the risk of injury associated with the job your employee performs. Typically, the more dangerous the job, the higher the rate.

One of the most cost-saving policies available to employers today is what’s known as a Pay-as-you-go premium policy, which deducts premiums from each payroll based on the jobs performed. A good system will a) offer job costing that allows the employee to select what task they are doing when they clock in b) accurately allocate and calculate the WC costs for the hours worked per job c) calculate the general premiums into the job and d) offer integration between your payroll company and the insurance company so that they receive the actual payroll numbers every time you process payroll.

Cost Example

With all the information above, here’s one example in which we outline a specific scenario:

Our employee is an electrician working at the hourly base rate of $18. In addition to the $18 per hour, there are additional costs like federal and state taxes as well as workers’ comp premiums.

Cost example:*

  • Labor 1 hour (18.00 per hour): $18.00
  • FICA ($18.00 X 7.65%): $1.38
  • FUTA ($18.00 X 0.6%): $1.08
  • SUTA ($18.00 X 3.0%): $0.54
  • WC rate for electrician ($18.00 X ($3.05 / 100)): $0.55

Subtotal per hour: $21.55

For a business to properly flourish, it is extremely important to accurately calculate the profits and losses for each job. Having a system that can tie everything together to provide an accurate picture of the true labor cost per job (including exact hours plus wage entitlements, employer taxes, and workers comp premiums) can make calculating the profits & losses a breeze.

With Fingercheck, you can not only calculate that but also set up an integration with your accounting software to easily bring in labor costs along with the rest of your expenses.

*These numbers are all based on a general example. Every company and state will have their own rates.

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