calculations, some projections will have to be made. You can never truly know the future, but you can make rational estimates.
Take a look at the Figure 6–1, “Labor Burden Calculation for Field Labor,” on page 69. At the top of the chart, total annual regular wages are listed for six employees. The totals are based on a year of 50 working weeks of 40 hours each. The remaining two weeks of the year are reserved for vacation time. Our hypothetical company, K&K Contracting LLC, has a total yearly field payroll of $187,500.
The bottom portion of the chart lists the various taxes and benefits. These are costs that relate directly to the wages of the contracting employees who work at job sites. Office personnel, sales staff, and executives are not included (unless the latter work regularly with the work crews at the job sites).
Every contracting company will have a slight variation from this chart; every state has its own rates for unemployment and workers’ compensation, and general liability. The various taxes and benefits of K&K Contracting are:
FIGURE 6–1: Sample Labor Burden Calculation for Field Labor, K&K Contracting
Social Security and Medicare taxes. Employers and employees each pay these taxes. The employer’s portion for Social Security is 6.2 percent of an employee’s wage, up to an annual limit set by the federal government. For 2015, the wage limit was $118,500, meaning that the maximum amount an employer must pay for one employee is $7,347. The employee’s portion is 6.2 percent of his or her wage. There is no maximum wage limit for Medicare taxes, which have a rate of 1.45 percent for the employer. Employees pay the same amount, which is deducted from their paychecks and sent to the government by the employer.
State unemployment tax. The tax rates are established by individual states and vary widely. Taxes are usually paid by the employer and not deducted from an employee’s paycheck. Most states have a range of rates, so employers who lay off more employees incur a higher tax rate, which also points in favor of subcontractors rather than a lot of full-time employees. Again, most states have a taxable wage limit; after an employee’s annual wage exceeds a certain amount, unemployment taxes are no longer charged to the employer. A few states offer an exemption to certain owners of the business; however, care must be taken with this option as it may result in higher federal unemployment taxes.
Federal unemployment tax. This tax is fairly simple and straightforward for most employers. The tax rate, as of 2015, is 6.0 percent of the first $7,000 of each employee’s wage, but most employers receive a credit of 5.4 percent when they file their Form 940, resulting in a net tax of 0.6 percent, or $42 per year.
Workers’ compensation. Once again each state has its own laws governing workers’ compensation insurance, which provides coverage for employees who are injured on the job. While the states set the rates, usually in dollars per $100 of payroll, insurance companies sell the product. These insurance companies are in competition and can offer to pay a dividend (return of premium) to companies who have excellent safety records. Rates in contracting and construction are typically very high due to the risk of injury on job sites. However, dividend payments can be as much as 50 percent of the annual premium.
General liability. The premiums for this insurance are based on payroll and vary from state to state and from contractor to contractor. The insurance covers several items, but the two most important features insure against damage to a client’s property and against injury or harm done after a project is completed. For example, if an employee backs a vehicle into a client’s garage, the general liability insurance will cover the damage; or if someone trips on a step installed by a contractor, general liability insurance will provide some protection against lawsuits and should pay for repair.
Paid vacations and holidays. While these are actually employee fringe benefits, they are expected by most employees. Employers who do not offer these benefits risk losing employees to competing businesses.
Health insurance premiums. Health insurance is a hot button-issue these days and is often the single largest annual expense for a small business. The health insurance industry is very complex and in a constant state of change. Therefore, contractors should consult with independent insurance agents who specialize in the field. This is certainly an area where one size does not fit all. Insurance agents can shop around to find the best plan for each contracting company. Typically, employers ask each employee to contribute a portion of the premiums.
Overtime. Unless a contractor can charge its clients extra when an employee works more than 40 hours per week, the cost of overtime should be included in the labor burden. In the case of K&K Contracting, each worker is estimated to work 44 hours a week for 40 weeks and 40 hours for the remaining 12 weeks of the year. The federal government has ruled that in general, employers must pay a wage of one-and-one-half times a worker’s regular wage for each hour over 40 worked in one week.
warning
Some employees must be paid overtime even if they are paid a salary. The rules are complex, so make sure you understand which of your employees must receive time and a half when they work more than 40 hours in a week.
As we see in Figure 6–1, the total labor burden for K&K Contracting LLC is just over $79,000 per year for its six employees. Therefore, the annual labor costs are far higher than the regular wages paid to employees. But how is this information useful to the budget and estimating process? Simple, really. You calculate the labor burden’s cost as a percentage of total field payroll by dividing the labor burden by the total payroll as follows:
$79,239 ÷ $187,500 = .421 = 42.1
As indicated earlier, labor costs are only one part of direct costs; the remainder includes estimated annual costs for materials, equipment rental, and subcontractors. In Figure 6–2 (page 72), we’ve set up a hypothetical direct cost budget for K&K Contracting.
Astute readers will notice that the cost of labor listed in the direct cost budget, given in Figure 6–2, ($101,250 + $67,500 = $168,750), does not equal the total annual
