Received a note from a young fellow the other day. He said he was told that a contractor should bill his employees out at their rate per hour times 2.6 to cover their cost and make a profit on that labor.
Please, don’t dump your overhead and profit burden onto labor. It doesn’t work. Charge a flat rate for your work that doesn’t play games with the numbers.
You have an employee you are paying $20 an hour. You charge them out at $20 x 2.6, or $52 an hour.
Or, take the same employee at $20 an hour and add the labor burden at 1.35 (or whatever your labor burden is – in some areas, like California, the rate is closer to 1.48). That makes their total cost $27/hour. That is the number that goes on your estimate sheet. Calculate the number of hours they will have on that job times $27 to determine your total labor cost, then apply a markup of 1.50 (or whatever the correct markup is for your business). You’ll be quoting a total price to the customer, not an hourly rate, but your effective labor rate is $40.50/hour.
I can hear some of you howling now, look at all the money you are giving away. That is not the point.
First, if you disclose your rate per hour, which you should never do but it is still done around this country by those that haven’t been bit hard enough yet, you are setting yourself up for a fight near the end of the job when they decide you are charging too much for your work.
Second, when you put your overhead burden on labor, your overhead is dependent on every employee working every day. If someone misses work, the overhead expense is still incurred, but the opportunity to recover overhead for that day is gone. Overhead is a 24 hours a day, seven days a week, 52 weeks a year monster. It doesn’t stop because somebody doesn’t show up for work.
On the other hand, a flat markup as we recommend provides the overhead dollars, regardless of who shows up for work. Jobs get done, you get paid. And you won’t be opening yourself up to an argument about your labor rate.