The Hidden Cost That Can Kill Contractor Profits

If you're paying an employee $30 an hour, that employee doesn't actually cost your business $30 an hour.

That's one of the biggest mistakes contractors make when estimating jobs. They use the employee's wage as their labor cost without accounting for payroll taxes, workers' compensation, benefits, paid time off, and non-productive hours.

The result? Jobs get underbid, profit margins disappear, and contractors end up working harder without making more money.

As a licensed general contractor and author of the Contractor Profit Blueprint, Brad shares invaluable insights on how to accurately calculate labor costs to avoid underbidding and losing money on jobs.

Key Points

1. Labor Cost vs. Wage

One of the most common misconceptions among contractors is equating an employee's wage with their total labor cost. Brad emphasizes that the wage is just a small part of the total labor cost. For instance, if you pay a carpenter $30 an hour, the actual cost to the business is significantly higher when you factor in payroll taxes, workers' compensation, and other benefits.

2. Non-Productive Time

Non-productive time is a major hidden cost that many contractors overlook. This includes time spent on activities like safety meetings, travel, and setup, which are not directly billable to the client. Brad explains that failing to account for this non-productive time can lead to significant profit leaks. For example, a job estimated to take 40 hours of productive work might actually take 50 hours when non-productive time is included.

3. Accurate Labor Burden Calculation

Brad provides a detailed breakdown of how to calculate the true labor burden. This includes:

• Base wage

• Payroll taxes (Social Security, Medicare, unemployment)

• Workers' compensation

• Employer-paid benefits (health insurance, retirement contributions, bonuses)

• Non-productive time (vacations, holidays, training)

4. Markup vs. Margin

Another critical point Brad makes is the difference between markup and margin. To achieve a 50% gross profit margin, you need to apply a 100% markup. Many contractors mistakenly apply a 50% markup, resulting in only a 33.3% margin, which significantly impacts profitability.

Action Steps

1. Calculate Your True Labor Burden

Take the time to calculate the true labor burden for each of your employees. Include all the factors Brad mentioned: base wage, payroll taxes, workers' compensation, benefits, and non-productive time. This will give you a more accurate picture of your labor costs and help you price your jobs correctly.

2. Factor in Non-Productive Time

Make sure to account for non-productive time in your job estimates. Track how much time your employees spend on non-billable activities and include this in your labor burden calculation. This will help you avoid underbidding and ensure that you are covering all your costs.

3. Use a Labor Burden Worksheet

To simplify the process, consider using a labor burden worksheet. Brad offers a comprehensive worksheet for $39 that calculates all the necessary factors for you. This tool can save you time and ensure accuracy in your calculations. You can find the worksheet at Hammer & Grind.

Understanding and accurately calculating your labor burden is crucial for maintaining profitability in your contracting business. By taking into account all the hidden costs and non-productive time, you can price your jobs more accurately and avoid costly profit leaks. Implement these action steps to ensure that you are not leaving money on the table and to improve your overall business profitability.

Resources

Want to go deeper?

Check out the Contractor Profit Blueprint: https://www.thecontractorprofitblueprint.com/

Book a strategy call with Brad: https://hammerandgrind.com/qualification-website