Updated in November 2024
In order to plan projects, predict your firm’s financials, and run a profitable company, you need to be able to accurately calculate both your labor burden and overhead expenses. These metrics are tied together and are both important for calculating things like your break even rate, developing your hourly billing rates, and assessing profitability of projects.
While rough estimates for these numbers are good to know off-hand, 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 (sometimes called payroll burden) is part of your firm's overhead expenses. To accurately calculate overhead expenses, you must determine your labor burden first.
Let’s define both and then dig into why knowing your up-to-date labor burden is so vital.
Overhead expenses are the indirect expenses needed to run your business, such as administrative or marketing costs. While they’re a significant piece of your firm's budget, they are not directly tied to service delivery for your clients or specific projects (unlike reimbursable expenses). Instead they are operational expenses.
Examples of overhead expenses include:
Rent for office space
Utilities (phone, internet, etc.)
Indirect Labor expenses
Advertising expenses
Legal expenses
Office supplies
Insurance
IT infrastructure
Company vehicles
Software subscriptions
Business taxes
Employee perks
Many of these expenses are fixed on a monthly or annual basis, but there are a few variable overhead costs. For example, your utility bills might fluctuate seasonally, travel may vary from month to month based on business needs, conference schedules, etc. Overall, your overhead expenses are the costs it takes to keep your business in operation on a day to day basis.
Firm leaders should have a strong grasp on overhead expenses. You should know the average monthly overhead cost for your business off the top of your head. You should also know your annual operating expense.
To calculate this number, look at profit and loss report for the past 12 months on an accrual basis. Divide the net operating expenses by 12 to determine your average monthly Overhead Costs. It is important to use a full year's expenses and divide by 12 rather than just look at the last month's actual expenses. By averaging an entire year you take into consideration expenses that are incurred less frequently, like annual insurance renewals, or one-off purchases of equipment.
Take a moment and quickly calculate the average monthly expense for your firm.
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 appropriate 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.
This number also is part of the calculations for other important Key Performance Indicators (KPIs) like Break Even Multiplier, Hourly Rates, Overhead Multipliers, and profitability.
Where overhead expenses are the costs of operating the business, the labor burden refers to the full cost you incur for your employees. These are the hidden expenses for each employee that go beyond just their salary or hourly wage. When you calculate labor burden, the amount for each employee will likely far exceed what’s on their paycheck. In fact, the average burden rate is around 23%. Meaning if you pay an employee $100 in salary, the actual cost to the business to employ that person is $123.
Labor burden includes:
Payroll taxes
Health benefits
Retirement benefits
Life insurance
Pensions
Workers' compensation
Vacation, sick, and personal days
Bonuses
Training and professional development allowances
This metric tells you how much it costs to employ your workers, beyond their wage alone. Calculating labor burden will help your business make more informed decisions about managing employees, projects, and budgets. It also helps you budget for firm growth, increasing headcount, and plan for annual compensation reviews.
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.
One additional thought about Labor Burden. This metric includes the investment you are making in your employees and the benefits and perks you offer to attract and retain top talent. Be very intentional about budgeting these things. It may be worth it to go above and beyond the industry average so you keep your team or attract the best employees. And investing in things like training and professional development can have a big return on investment by making your team more skilled and efficient. This is not necessarily a place in your budget you should look to cut costs. Rather you should strategically look to invest in the areas that will lead to a better team.
Labor burden is the total indirect costs of your employees expressed as a percentage of the direct salary or wage costs.
Example: Labor Burden = Indirect Labor Costs/Direct Labor 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, read this article.
Knowing your labor burden rate comes with numerous benefits for architecture and engineering 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, to adjust your prices, identify where to save money, and determine how efficient your firm is per hour of work.
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.
BQE CORE provides the best cloud-based business management software specifically focused on the architecture and engineering industry. It was designed by architects and engineers to better manage their firms. BQE CORE helps you and your team manage your projects, expense tracking, invoicing, 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!