Contractor Business
How to Calculate Labor Cost for a Contractor Estimate
Calculate accurate contractor labor cost using wages, payroll burden, crew hours, productivity, overhead, and profit.
Labor is often the largest and least predictable part of a contractor estimate. Using an employee’s wage as the labor cost leaves out taxes, insurance, paid time, supervision, and the hours your company pays for but cannot bill. A reliable estimate separates labor cost from the customer-facing labor price and builds both from realistic production hours.
WORKED PRICING EXAMPLE
Build the price in seven steps
Burden rate = Employee-related costs ÷ Base wagesBurdened hourly cost = Wage × (1 + Burden rate)Individual labor cost = Burdened rate × Estimated hoursCrew labor cost = Sum of every worker’s labor costExample: ($44 × 16 hours) + ($29 × 16 hours) = $1,168Labor selling price = (Labor cost + Allocated overhead) ÷ (1 − Target margin)Example: ($1,168 + $480) ÷ 0.75 = $2,197.33Example only. Replace every figure with your business’s actual costs and target.Estimate production hours before multiplying rates
Break the scope into measurable tasks and estimate the hours each worker or crew will need. Use completed-job history whenever possible. Include setup, protection, loading, cleanup, and normal job-site movement—not only the minutes spent installing or repairing.
Start with each worker’s base wage
Record the regular hourly wage for every employee assigned to the job. Include the owner’s field time at a reasonable replacement wage, even if the owner takes draws instead of payroll. Free owner labor makes the estimate look profitable while hiding the cost of delivering the work.
Add payroll taxes and statutory costs
Employer Social Security and Medicare taxes, federal and state unemployment taxes, workers’ compensation, and other required costs sit on top of wages. The exact burden varies by location, trade, claims history, and employee earnings, so use your payroll and insurance records rather than a generic percentage.
Add benefits and paid nonworking time
Health benefits, retirement contributions, bonuses, paid holidays, vacation, sick leave, training, uniforms, and other employee costs belong in labor burden. Paid time off increases the cost of each productive hour because the annual expense must be recovered from fewer working hours.
Calculate the burdened hourly labor cost
Add annual wages and all employee-related costs, then divide by productive paid hours. A simpler estimate multiplies the wage by one plus the verified burden rate. At a $28 wage and 32% burden, the burdened labor cost is $36.96 per paid hour.
Calculate crew labor cost
Calculate each person separately, then multiply their burdened rate by their estimated hours. If a lead at $44 per hour works 16 hours and a helper at $29 per hour works 16 hours, direct crew labor is $1,168. Crew size does not reduce total labor hours automatically; two people for eight hours equals sixteen labor hours.
Adjust for productivity and job conditions
Access, occupied spaces, weather, travel within large sites, material handling, inspections, learning curves, and complex cleanup can reduce production. Add the required hours openly or include a documented contingency. Do not hide predictable inefficiency inside an unexplained markup.
Turn labor cost into a selling price
Burdened labor is still only a direct job cost. Add the job’s overhead allocation and other costs, then price for the target margin. If labor cost is $1,168 and allocated overhead is $480, labor-related cost is $1,648. At a 25% target margin, the required labor selling price is $2,197.33 before materials and other job costs.
Compare estimated hours with actual hours
After completion, record actual labor hours by task and explain meaningful differences. Update production assumptions for the next similar estimate. A simple estimate-versus-actual habit improves labor accuracy more reliably than relying on memory.
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