Crunching the numbers to calculate your labor burden will help you effectively quote potential clients and boost your profitability.
Labor Burden vs. Overhead Expense: What’s the Difference?
"Labor burden" and "overhead expense" are financial concepts that business owners need to know when estimating the costs associated with their projects.
In order to plan projects, predict your firm’s financials, and run a profitable company, you need to accurately calculate your labor burden and overhead expenses. No budget is complete without both!
While rough estimates are a great starting point, your profits will suffer if you don’t have a precise idea of a project’s expenses and the actual cost of employing your staff. Your labor burden is part of your overhead expenses, so to accurately calculate overhead expenses, you must determine labor burden.
Let’s define both and then dig into why knowing your up-to-date labor burden is so vital.
What is Overhead Expense?
Overhead expenses are the fixed or indirect expenses needed to run your business, such as administrative or marketing costs. While they’re a significant piece of running your business, they are not directly tied to service delivery for your clients.
Some examples of overhead expenses include:
Rent for office space
Most of these expenses are fixed, but there are a few variable overhead costs. For example, your utility bills might fluctuate seasonally, but overhead expenses tend to be the fixed costs you pay to operate each day.
Overhead costs don’t produce revenue directly but are required to run your business. Tracking these expenses is important because it helps you manage your budget and set prices for your services, so you can generate a profit. If you don’t know how much your business spends, you can’t fully understand how much it makes.
What is Labor Burden?
Labor burden refers to the full cost you incur for your workers. These are the hidden expenses for each employee that go beyond salary or hourly wage. When you calculate labor burden, the figure you discover for each employee will likely far exceed what’s on their paycheck. In fact, the average burden rate is around 23%!
Labor burden includes:
Vacation, sick, and personal days
Training and development
This metric tells you how much it costs for your workers to complete a project, beyond their wage alone. Calculating labor burden will help your business make more informed decisions about managing employees, projects, and budgets. Too often, labor burden is an overlooked metric, but it needs to be calculated at least once a year, as changes might occur if insurance costs spike or pension contributions increase.
How to Calculate Labor Burden
Labor burden is the total indirect costs expressed as a percentage of the direct costs.
Example: Labor Burden = Indirect Costs/Direct Costs*100
Calculating labor burden can be complex. Companies often allocate an affixed percentage such as 25% of the employees’ wages. While calculating labor burden can be done manually in Excel, to eliminate errors and time-consuming work, you can easily work calculations in a firm management software such as BQE CORE.
For more information on how to calculate labor burden costs, click here.
What are the Benefits of Knowing Your Labor Burden Rate?
Knowing your labor burden rate comes with numerous benefits for professional services firms. It enables you to price your projects for profitability and understand what drives profits for your company.
You will also be able to estimate and utilize your resources more accurately and efficiently, adjust your prices, identify where to save money, and determine how efficient your firm is per hour.
Analyzing your burden rate will illuminate how even minor changes in the way you operate, whether it’s at the individual, department, or project level, could result in increased profitability.
It may also reveal where you need to add staff or invest in more training for your current team.
It’s called a burden, but once you’re in control of it, it's a benefit, allowing you as the business owner to set up projects for greater success, make decisions easier, and improve employee utilization.
How BQE CORE Helps You Calculate Labor Burden
BQE CORE provides the best cloud-based business software to manage your projects, expense tracking, payroll, and more, with built-in reporting that enables you to calculate your overhead expenses and labor burden.
BQE CORE allows you to track project expenses, cost analysis, employee utilization and realization rates, project time, profitability, and many custom reports tailored to your needs.
The time and expenses that you and your team track using BQE CORE automatically feed into your reporting, saving you hours of manual time entry and calculations.
BQE CORE helps your firm understand exactly how much your employees cost your firm for every hour they work, beyond salary alone. When you know this, you can set the proper prices for clients to ensure you’re set up to make a profit.
Instead of starting a project and hoping for the best, empower yourself to analyze your spending and optimize it.
Don’t let your business fail because you only focused on straightforward payroll costs and neglected to calculate the entire actual cost of enabling your staff to perform their work. It’s simpler than you think, and BQE CORE is here to assist!
Book a demo today to see how we can help your firm work more efficiently and boost profits.