Blended Burdened Rate vs. Actual Labor Cost: Why Your Bid, Your Budget, and Your P&L Don’t Agree
By Jim Keeney, Dapt
A contractor with its own crews carries two labor-cost numbers. The first is the blended burdened rate: what an hour of a crew type should cost. It is the number you budget and bid with. The second is actual labor cost: what the work cost according to payroll. It is the number recorded on the P&L by job.
The link between them runs one way. Actual cost goes into the P&L by job. Reviewing that P&L against the budget shows where the rate was right and where it was wrong, and that review is what adjusts the rate for the next bid. When the two drift apart and nobody looks, you win the jobs you underpriced and lose the ones you would have made money on. Margin shows up at year end with no way to say which jobs produced it.
The Rate and the Actual
At estimating time the crew has not been assigned, so labor is priced with a blended burdened rate. That rate is an average wage for the crew type plus an allowance for employer taxes, workers’ compensation, insurance and benefits. Once the job is awarded, that number is the budget the project team is measured against. As you track progress, compare like with like: measure the job against the same burdened rate the budget was built on.
After payroll runs, the actual exists. It is who did the work, what they were paid, and what overtime, employer taxes, benefits and fringe added to it. That is the number on the P&L by job, because it is the money that left the company. A company that never produces it has no way to find out its rate is wrong.
Hours or Rate: Which One Missed
Every labor line is hours times a rate, so every labor variance is one of two things. A thousand hours at $50 is a $50,000 budget. When actuals show $60,000, either the work took 1,200 hours at the rate the estimator assumed, or the budget rate was wrong and the hour actually cost $60. The first is a productivity problem and belongs to the foreman. The second is a rate problem that has to be fixed before the next bid. A report that shows only the total does not tell you what went wrong, and you are left flying blind, unable to improve.
Why They Never Agree
A blended rate is an average. Payroll is what happened. They part in four places:
- Crew mix: The senior carpenter costs half again what the apprentice costs. The estimate priced the average; the job got one or the other.
- Overtime: The premium lands on the job that ran the overtime, and a blended rate does not carry it. When an employee works at more than one rate in a week, the overtime rate itself moves.
- Workers’ compensation by class: The rate follows the work, not the person. A carpenter on roofing hours is costed at the roofing rate.
- Prevailing wage and fringe: Public work adds a wage rate and a fringe schedule that private work does not have. No single rate is right on both.
What This Does to Your Bids
Company totals hide the damage. Two carpenters: the junior costs $40 an hour, the senior $60, and the estimating rate is $50. The junior works a hundred hours on Job A: estimated $5,000, actual $4,000. The senior works a hundred on Job B: estimated $5,000, actual $6,000. Across the company, $10,000 estimated and $10,000 actual. The total is perfect and both jobs are wrong. When Job B is the kind of work that always needs the senior crew, the bidding assumption for that whole kind of work is wrong while the company average stays right.
So actual labor has to be read by the groups that drive cost: trade, crew type, project type, prevailing wage versus private. The groups come from the time record, the same place the job and cost code do, so they cost nothing extra to keep.
Simplify and Centralize Your Business.
Learn how JobTread can help you focus on what matters most.
What Automation Changes
All of this assumes the actual number exists. Payroll knows what each employee cost; time tracking knows where they worked; job cost needs the two combined, every pay period. Done by hand it is a day per payroll, so it happens quarterly, and the estimator keeps bidding on old information.
Automated job costing takes the hours by job and cost code, runs payroll on them, and posts actual labor cost to each job the day payroll runs. Three things follow:
Actual cost reaches the job without anyone building it
Wages, employer taxes, workers’ comp, benefits and fringe post to accounting by job and cost code, and the job cost report is built on actuals rather than on a rate.
The variance separates into its two parts
Estimated hours at the estimated rate against actual hours at actual cost, per job, per period. A job can be efficient and still miss because the rate was wrong. Another can be inefficient and look fine because it got the cheaper crew.
The bid rate becomes measured instead of assumed
Last quarter’s actuals show $535,000 of burdened carpentry over 10,000 hours: $53.50 against the $50 in the template. Review quarterly and move the rate when the gap has held for two quarters.
How to Trust Your Numbers
Keep both numbers and name them: the estimate carries the blended rate, the accounting system carries actual cost by job.
Keep the hours and the rate separately, not just the total, so you can say later which one missed.
Close the loop: time captured against the job, payroll run from that time, results posted back to the job, and the variance back to estimating. The last step is the one most often skipped, and the one that makes the next bid better.
The gap between the blended rate and actual cost is the signal. Without it, management says labor ran high. With both numbers, management knows which of the two things went wrong and what to change before the next bid. A full walkthrough, with the payroll mechanics and a worked prevailing-wage example, is at dapt.tech.
Jim Keeney is the founder of Dapt, which connects JobTread time tracking to payroll and accounting so that actual labor cost lands on the job every pay period. He has spent seven years on payroll accounting for contractors and answers his own email. Send him one payroll register and one week of time and he will show you the two numbers side by side: jim.keeney@dapt.tech, or book twenty minutes.
Ready to take your business to the next level?
Explore it for yourself or let one of our knowledgeable staff members show you how.
Book a Demo