Fully Burdened Labor Rate: True Hourly Cost

Summary

Calculate the real all-in hourly cost—taxes, benefits, paid time off, and overhead—so you can price projects accurately and protect margins.

Introduction

If you price work using only an employee’s base wage, you risk underestimating costs and shrinking margins. The fully burdened labor rate reveals each person’s true hourly cost so you can bid smarter, protect profits, and make clearer hiring decisions. This guide breaks down cost components, gives a repeatable calculation, and points to tools to refine your inputs.

What is the fully burdened labor rate?

The fully burdened labor rate is the true hourly cost your company pays for an employee. It includes base wages, employer payroll taxes, benefits, paid time off, training, equipment, and that employee’s share of overhead. Knowing this number helps you avoid underpricing work and keeps margins consistent.

Why base pay isn’t enough

Using only base wages to price projects omits significant costs. Employer-paid benefits and payroll taxes commonly add 20–40% or more to base pay¹. Shared overhead further increases the true cost per billable hour. Ignoring these elements can turn a profitable-looking job into a loss.

What costs are included in a fully burdened rate?

Group costs into three buckets:

• Direct labor costs: base wages, overtime, commissions, and bonuses.
• Indirect labor costs: employer payroll taxes, health and other insurance premiums, retirement contributions, paid time off, training, onboarding, and equipment tied to the hire.
• Overhead allocation: rent, software subscriptions, non-billable staff, utilities, and other shared operating costs allocated per employee.

How to calculate the fully burdened hourly rate

Follow these steps using actual annual numbers:

1. Gather accurate annual cost data

   • Direct wages: salary, expected overtime, commissions, and bonuses.
   • Indirect costs: payroll taxes, benefits, insurance, retirement contributions, training, and equipment.
   • Overhead pool: total business overhead allocated to this role or employee.

2. Total annual employee cost

   • Add direct wages + indirect costs + allocated overhead = total annual employee cost.

3. Determine realistic billable hours

   • Start with 2,080 hours (40 hours × 52 weeks), then subtract vacation, holidays, sick time, training, internal meetings, and other non-billable activities to reach expected annual billable hours.

4. Final calculation

   • Divide total annual employee cost by billable hours to get the fully burdened hourly rate.

Example

Suppose Alex, a graphic designer, costs $90,000 per year when you add wages, taxes, benefits, and allocated overhead. If Alex realistically has 1,700 billable hours after PTO and non-billable time, then:

$90,000 ÷ 1,700 = $52.94 per billable hour.

That $52.94 is the true hourly cost your business absorbs when Alex is billing time.

Estimating billable or productive time

If you don’t know realistic utilization rates, use production-time or utilization tools to estimate role-specific hours. For production teams, try the Manufacturing Production Time Estimator. For job-level material planning in construction, use the Construction Material Cost Predictor.

Allocating overhead

Don’t use the same overhead rate for every role. Allocate overhead by role or function when possible. For example, developers and field technicians use different software, hardware, and facilities. Allocate shared costs proportionally or by headcount where role-level allocation isn’t feasible.

Using the rate to price projects and make decisions

Use the fully burdened rate to:

• Set billing rates with a clear margin target.
• Compare hiring versus outsourcing or automation costs.
• Create role-based billing rates so projects reflect actual resource costs.

Design teams can map fees to real costs using the Architectural Design Fee Estimator. Real-estate professionals estimating project returns can use the Real Estate Flip Profit Estimator.

Common mistakes to avoid

Watch out for these pitfalls:

• Not subtracting all non-billable time, such as meetings, training, and admin work.
• Using outdated payroll tax or benefits numbers.
• Applying a single overhead rate to every role without adjustments.
• Ignoring regional price differences for pay and benefits.

These aren’t just calculation errors — they’re business risks. Keep data current and recalculate after raises or insurance cost changes.

Practical tips and next steps

Recalculate at least yearly and after major cost changes. Use role-specific rates for designers, project managers, and technicians rather than a flat company rate. Compare your rates to industry or regional benchmarks to spot gaps. If you build a spreadsheet, include separate lines for each indirect cost and a field for billable hours so assumptions are visible and easy to update.

FAQ — Quick answers

Q: How often should I recalculate the fully burdened rate?

A: At least once a year and after any major pay or benefits changes.

Q: Can I use one average rate for everyone?

A: You can, but role-specific rates are more accurate and help prevent mispricing.

Q: What’s the difference between labor burden and overhead?

A: Labor burden is employee-specific costs tied directly to a hire, like payroll taxes and benefits. Overhead is the shared cost of running the business that you allocate across employees.

Quick Q&A — Common user questions

What’s the single most important input?

Billable hours. A small change in assumed billable hours can shift your hourly rate significantly.

How do I handle contractors or freelancers?

Treat contractor fees as direct costs; compare contractor hourly rates to your fully burdened employee rate to decide which is more cost-effective.

How should I present rates to clients?

Base client billing on fully burdened rates plus your margin target; be transparent internally about the components so teams understand pricing drivers.

Three concise Q&A summaries

Q: Why calculate a fully burdened rate?

A: To reveal the true cost of labor so you bid accurately, preserve margin, and make informed hiring or outsourcing choices.

Q: What’s the fastest way to get a reliable number?

A: Add direct pay, indirect employee costs, and allocated overhead, then divide by realistic billable hours.

Q: What common assumption causes the biggest error?

A: Overestimating billable hours. Track actual utilization and update assumptions regularly.

Internal links

• How to price projects
• Employee benefits resources
• Billing and rates tools

Calculating your fully burdened labor rate is straightforward in concept. Once it’s routine, you’ll bid smarter, protect margins, and make growth decisions with more confidence.