McCadden: A Sound Strategy to Determine Your Labor Costs

by Kyle Clapham

Production labor costs are one of the key ingredients to profitable estimating and pricing for remodeling projects. If you can’t or don’t properly calculate the breakeven costs to put labor in the field, your business risks underpricing the projects it sells. Worse, until you know how to properly calculate and also job cost—apples to apples—you will continue to unknowingly underprice your projects.

A lot goes into accurately determining what it really costs to put an employee in the field for each hour worked before you earn any gross profit on that labor—way more than can be covered in one article. Below are some common mistakes.

Labor Burdens vs. Overhead

A sound financial strategy for your business requires a clear understanding and separation of labor burdens versus business overhead. Labor burdens should be considered job costs and should be included in estimated costs before markup. Overhead is the expenses the business pays that cannot be specifically estimated into the cost of producing a specific project. Overhead expenses should be covered by the markup applied to estimated costs to cover your overhead.

For example, workers’ comp is often wrongly considered overhead. For an office employee, it is overhead. For a field employee, it should be considered an estimated job cost. To get that cost into your estimates, it needs to be part of the burdened labor cost added to the wages you pay employees.

Another example is vehicle cost. A vehicle used by a salesperson is considered an overhead expense, but the vehicle a carpenter needs to complete work in the field should be considered a job cost. Again, this should be added to the assumed labor cost you use when estimating project hours.

In addition to separating costs from expenses when you estimate jobs, it’s just as important to use the same strategy of separation when you do job cost.

For example, if you assume burdens such as workers’ comp and vehicles on your labor when you estimate the cost of a project, but your job cost reports only include wages and taxes paid on that labor, you will be comparing apples to oranges. In the example below, a remodeler may be led to believe his or her projects are coming in underbudget. Think of it like estimating in English but job costing in French, without an interpreter.

Reasons to Separate Costs, Expenses

By separating cost and expenses, you will know the breakeven cost of your labor. This is the cost before any gross profit or profit is applied or assumed. This knowledge will help your business in many ways.

If an estimate given to a lead carpenter overseeing a job includes a budget of $5,000 for staff labor to frame an addition, but the lead carpenter wants to consider subbing out the framing to keep the project on schedule, can he or she confidently compare the price a sub offers for that work to the framing budget in the estimate?

If you use the strategy recommended here, yes, an apples-to-apples comparison can be made. However, if vehicle and workers’ comp costs were considered overhead instead of labor burden, the comparison to the sub’s quote becomes apples to oranges. Does your lead carpenter know how to make the conversion?

Determining the markup your business must use in order to cover overhead on estimated costs is much simpler if your overhead costs are fixed. If burdens like workers’ comp and vehicles are considered job costs, keeping to a fixed overhead budget is much easier.

On the other hand, if costs vary during the year and are consider overhead—depending on how many employees you have in the field, how many trucks your business will need to support them, and the gross profit dollars you will need—the necessary markup will constantly change as you do business throughout the year. Does your salesperson or estimator understand this?

Guidelines for Burdened Labor Costs

  • Use a spreadsheet tool. Create or find an Excel template. To download mine, just go to
  • Be sure the figures you are using are based on the current year’s costs.
  • Incorporate PTO. Be sure you’re collecting enough money from the hours an employee actually works to also cover pay for holidays, vacations and other non-productive time.
  • Verify your cost assumptions against changes during the year, so you can update your labor costs. Check workers’ comp and employer-paid tax rates: Have they or will they change?
  • Adjust your burdened labor costs inside estimates well in advance as needed, so you will cover your real costs incurred at the actual time of construction.
  • Anticipate employee raises during the coming year in advance of selling the work to be completed after the raise.
  • Be clear on how you separate overhead expenses from burdened cost of labor. Depending on your method, either the labor cost goes up, or the markup to cover overhead goes up. Sometimes both.

Have Confidence in Your Strategy

If you complete the work done within the estimate, you are on the right track. But if you use the wrong assumption for the burdened cost of labor, you’ll either make more money than anticipated—or less. QR

Shawn McCadden is a speaker, business trainer, columnist and award-winning remodeler with more than 35 years of experience. He can be reached at

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