How to Calculate Labor Cost and Your True Labor Rate, Step by Step

You know what you pay your people per hour. The harder questions are what an hour of their time actually costs the business, and what rate you need to bill to cover it. If your labor rate is the wage plus a little, you’re likely paying for overhead and profit out of your own pocket.

This post walks through the same five steps the free labor rate calculator uses, with a full worked example you can follow with your own numbers.

Step 1: Start with the wage

Begin with what you actually pay. If you want a reference point, the U.S. Bureau of Labor Statistics publishes national median hourly wages by occupation. These are from its Occupational Employment and Wage Statistics May 2025 national estimates, released May 15, 2026:

• Carpenters: $29.12
• Construction laborers: $22.66
• Electricians: $30.38
• Plumbers, pipefitters and steamfitters: $30.67
• Heating, air conditioning and refrigeration mechanics and installers: $29.33
• Tile and stone setters: $26.77
• Roofers: $26.65
• Painters, construction and maintenance: $23.75
• First-line supervisors of construction trades: $38.42

A median means half of workers earn more and half earn less, and wages vary a lot by region. Use your own payroll. For the example here, we’ll use the carpenter median of $29.12 an hour and a full-time year of 2,080 paid hours (40 hours × 52 weeks).

Yearly wages: $29.12 × 2,080 = $60,569.60

Step 2: Add labor burden

Labor burden is what an employee costs you beyond the wage. The main pieces:

• Employer payroll taxes. Under federal law, employers pay 6.2% for Social Security and 1.45% for Medicare on wages, 7.65% together. On top of that come federal and state unemployment taxes, which vary by state and by your account’s rate.
• Workers’ compensation. Rates vary widely by trade, state and claims history. Use the rate on your own policy.
• Benefits. Health insurance, retirement contributions and anything else you pay for.

In the example we’ll use 10% for all payroll taxes (7.65% plus an allowance for unemployment taxes), 8% for workers’ comp and $6,000 a year for benefits. These are example inputs, not benchmarks. Swap in your own.

• Payroll taxes: $60,569.60 × 10% = $6,056.96
• Workers’ comp: $60,569.60 × 8% = $4,845.57
• Benefits: $6,000.00
• Total yearly cost: $77,472.13

Divide by 2,080 paid hours and each hour on the clock costs you $37.25, not $29.12.

Step 3: Count the hours you can actually bill

Nobody bills 2,080 hours a year. Paid time includes driving between jobs, picking up materials, shop time, rain days, warranty callbacks, training and any paid holidays or time off. That time costs you money and has no invoice attached.

If you don’t know your number, track it for a few weeks. In the example we’ll assume 25% of paid time can’t be billed:

• Billable hours: 2,080 × 75% = 1,560
• Cost per billable hour: $77,472.13 ÷ 1,560 = $49.66

That one step adds more than $12 an hour. It’s also an easy input to guess too low, because unbilled time is spread across a hundred small moments.

Step 4: Add this worker’s share of overhead

Overhead is everything the business spends that isn’t tied to one job: vehicles and fuel, insurance, rent or a shop, office staff, phones, software, marketing, accounting, and your own time spent estimating and selling. Each billable hour has to carry a share of it.

A simple way to split it: take your yearly overhead and divide it by the number of field workers, or by the total billable hours across your crew. In the example, this worker’s share is $15,000 a year.

• Break-even rate: ($77,472.13 + $15,000) ÷ 1,560 = $59.28 an hour

Bill less than $59.28 for this worker and every hour loses money, even though you’re charging about double the wage.

Step 5: Add your margin

Now add profit. Use margin, and divide instead of multiplying:

• Billing rate: $59.28 ÷ (1 − 0.20) = $74.10 an hour for a 20% margin

If you multiply instead ($59.28 × 1.20 = $71.14), you’ve added a 20% markup, which is only a 16.7% margin. The difference is about $3 an hour, or about $4,600 a year across this worker’s 1,560 billable hours. Our post on markup vs. margin explains why.

In this example, the billing rate comes to about 2.5 times the wage. That ratio isn’t a rule; it’s what these inputs produce. Your numbers will give you your own ratio.

Why a lower wage can need a bigger multiplier

Run the same inputs for a construction laborer at the BLS median of $22.66 an hour, keeping benefits at $6,000 and the overhead share at $15,000. The break-even rate comes to $49.11 and the billing rate at a 20% margin to $61.39, about 2.7 times the wage. Benefits and overhead are fixed dollar amounts, so they weigh more on a lower wage. A flat “wage times two” rule would underprice your lower-paid workers the most.

Mistakes to avoid

• Spreading costs over every paid hour. If you divide by 2,080 hours, you’ll never recover the hours you can’t bill.
• Leaving out your own pay. If you work in the field, count your hours and pay like anyone else’s. If you run the office, your salary belongs in overhead.
• One blended rate for everyone. A lead carpenter and a helper cost different amounts. If you sell one rate, weight it to the crew you actually send.
• Forgetting overtime. Federal law requires time and a half for most hourly employees past 40 hours in a week. Jobs that run long cost more per hour than jobs that don’t.
• Never updating it. Re-run the numbers when wages, insurance or overhead change, and at least once a year.

Put the rate to work

Use your billing rate to price the labor lines in your estimates, and compare it with what jobs actually take. If a bathroom you estimated at 120 labor hours took 160, the rate was fine but the hours weren’t, and your next estimate should change.

Try your own numbers in the free labor rate calculator, use the markup and margin calculator to price materials and subs, and check the pricing guides for published job benchmarks. The glossary defines labor burden, overhead and other pricing terms in one place. In ECHOPS, crew time sheets and the labor report show the hours each job actually used, and on the Company plan, payroll counts overtime at 1.5 times past 40 hours and exports each pay run as a CSV for your payroll provider.

FAQ

What is labor burden in construction?

Labor burden is what an employee costs you beyond the wage. The main pieces are employer payroll taxes (under federal law, 6.2% for Social Security and 1.45% for Medicare, plus unemployment taxes that vary by state), workers’ compensation and benefits. In this post’s example, burden turns a $29.12 carpenter wage into $37.25 for every paid hour. Use the rates from your own payroll and policies.

What is a fully burdened labor rate?

It’s what a worker costs per hour once labor burden is added to the wage. In this post’s example, wages, payroll taxes, workers’ comp and benefits come to $77,472.13 a year, or $37.25 per paid hour. For pricing, divide by the hours you can actually bill instead: at 1,560 billable hours, it’s $49.66. Otherwise the unbilled time comes out of your profit.

What is labor cost, and how is it different from a billing rate?

Labor cost is what an hour of a worker’s time costs the business. Your billing rate adds that worker’s share of overhead, then your margin. In the example, $49.66 of cost per billable hour plus a $15,000 overhead share gives a $59.28 break-even rate, and a 20% margin brings the billing rate to $74.10, about 2.5 times the wage. That ratio comes from these inputs; it isn’t a rule.

How do you estimate labor costs for a construction job?

Estimate the hours each part of the job will take, based on your past jobs, and multiply by a billing rate that covers labor burden, unbilled time, overhead and margin. Then compare with what the job actually took. If a bathroom you estimated at 120 labor hours took 160, the rate was fine but the hours weren’t, so change the next estimate. Our guide to estimating construction costs covers the rest.