On the surface, paying your own employees $25 dollars per hour to hang drywall rather than hiring a sub contractor to do the same job at $65 dollars an hour might seem like a no-brainer. But is it really that simple? On Wednesday, September 10, industry consultant Leslie Shiner addressed attendees of the Remodeling Show in Baltimore, Md., on just that topic. The key to determining the true cost of an employee – and in turn, what you should be charging clients for his time – is accurately calculating labor burden. A typical $25-per-hour employees, Shiner explained, could actually be costing you more than twice that.

"It’s important to track all of these costs and put them above the line," Shiner said. "If it is tracked as part of job costs, when you increase your volume, your gross profit margins will stay the same and your overhead will not increase dramatically."

During the session, Shiner named some of the items that contribute to labor burden that should be considered when calculating the true cost of labor:

  • Payroll taxes. FICA, unemployment, Social Security – all of these costs associated with paying your employees should be calculated as part of labor and billed above the line.
  • Workers' compensation. "Even if your experience modification is below 100%, you should be billing as if it were above 100%," Shiner says. (A low "experience mod," or safety rating, allows contractors to pay discounted rates as a reward for a clean safety record.) The reason for the billing adjustment: An accident can happen at any time, thus increasing your experience mod to 100% or more. "It’s about being prepared for the unexpected," Shiner says.
  • Liability Insurance.To determine how much more you should charge for labor to account for liability insurance, divide the total amount you spend on liability insurance in a year (for instance, $20,000) by your total annual payroll (say, $350,000) to get the percentage of cost that should be added to your hourly labor rate. In this example, 5.71%. So, if one of your carpenters makes $25 per hour, you should add $1.43 (5.71%) to your hourly rate.
  • Health Insurance. Use the same formula described above to determine how much additional must be charged to account for the employer’s cost of employee health insurance.
  • Vacation, holiday, and sick time. Paid time off is a fantastic employee benefit, but the cost of literally paying your employees not to work must be accounted for in the hourly rate charged for jobs that they do work.
  • 401(k) and other pension plans.
  • Small tools. Remodelers rarely account for lost, stolen, or abandoned tools in their labor costs. According to Shiner, this ostensibly trivial cost adds up quickly, and will probably add 50 to 75 cents to your hourly labor rate.
  • Variable overhead. In this category, you should include all costs that are directly related to employees but cannot be divided precisely between jobs. These costs may include vehicle costs, education, fuel, cell phones, and others. Shiner offers this explanation: Employee cell phones are costs directly related to your various jobs, but to try to apportion those costs between jobs in accordance with how many phone minutes were used for that job wouldn’t make much sense. Instead, the cost should be absorbed into the hourly rate.

When all is said and done, says Shiner, a $25-dollar-per-hour employee may turn out to actually cost a company two or even three times that much. It may not be a number that remodelers like to think about, but knowing the true cost of an employee allows you to budget accurately to achieve your target margins—the only numbers that really matter at the end of a job.