When pricing labor-only jobs, be sure to allow for labor-specific contingencies. For example, a change in the number of employees affects the apportionment of overhead dollars per hour worked. If a sick, low-paid worker has to be replaced with a higher-paid worker, that affects the burdened labor rate if you based it on the low-paid worker. Watch out, too, for situations like a decrease in the proportion of billable hours per employee and lost time due to startup inefficiencies if this job is a "first of its kind" for your company.

Example 1

You plan to use a motivated carpenter (@$15/hour) with average skills on an estimated 100-hour project. If your carpenter is injured or otherwise unable to complete the job, here are the financial implications of replacing him with a master carpenter or a combination of master carpenter and helper. Assume the master carpenter will work at the same pace as his lower-paid counterpart.

EMPLOYEE HOURLY WAGE BURDENED COST HOURS LABOR COST PER EMPLOYEE TOTAL LABOR COST
Carpenter $15.00 $24.65 100 $2,465.00 $2,465.00
Master Carpenter $22.50 $34.62 100 $3,462.00 $3,462.00
Master Carpenter + Helper $22.50 + $10.00 $34.62 + $18.00 75 + 50 $2,596.50 + $900.00 $3,496.50
It can be dangerous to estimate based on a specific employee because if you have to replace him, it will usually cost you. Instead, consider estimating based on an average hourly burdened labor cost.

Example 2

You have taken a job in which you must use materials and techniques with which your employee is not familiar. The manufacturer suggests 24 hours for this job. You assign one of your best employees who has a base pay of $20/hour with a burdened labor rate of $31.30/hour. Your labor-only hourly charge out rate is $57.50/hour. This is a fixed price job. Here's what happens if he goes over the estimated time by 4 hours.

HOURLY

BURDENED RATE
ESTIMATED # HOURS TO APPLY (includes 20% buffer) ESTIMATED COST ESTIMATED REVENUE @$57.50/HR (fixed) ESTIMATED GROSS PROFIT ESTIMATED GROSS PROFIT MARGIN
$31.30 24 $751.20 $1,380.00 $628.80

45.6%

HOURLY BURDENED RATE ACTUAL # HOURS TO APPLY ACTUAL COST ESTIMATED REVENUE @ $57.50/HR (fixed) ACTUAL GROSS PROFIT ACTUAL GROSS PROFIT MARGIN
$31.30 28 $876.40 $1,380.00 $503.60 36.5%

--Melanie Hodgdon of Business Systems Management, Bristol, Maine, is a QuickBooks professional adviser offering organizational and business services to construction companies nationwide.