Labor Rate

Find out what labor rate is, how it's calculated, and why it matters for budgeting and project planning.

By Dmytro Sidenko

Labor Rate

What is labor rate?

Labor rate refers to the hourly cost of paying a worker, including wages and indirect employment expenses. It often includes not just the employee’s base pay, but also additional costs like taxes, insurance, and benefits. Labor rates help businesses estimate the true cost of labor when planning budgets, setting prices, or quoting clients.

For example, in industries like construction, consulting, and manufacturing, labor rates are essential for project costing, billing clients accurately, and ensuring profitability. A construction firm may use labor rates to calculate the cost of skilled trades per hour, while a consulting agency might apply a higher rate to reflect both employee time and overhead.

Why labor rate matters

A labor rate is crucial because it helps businesses understand the true cost of employing workers, not just their wages, but also other expenses like benefits and taxes. 

By understanding labor rates, companies can accurately forecast labor costs when preparing project bids or budgets, ensuring they cover both direct wages and indirect expenses.

An incorrect labor rate, too low or too high, can lead to wrong cost estimates, making bids uncompetitive or causing budget problems and lower profits.

Labor rate formula

Calculation of a labor rate is important for businesses to price services accurately, bid on projects profitably, cover all costs, and pay employees fairly. Below, we’ll explain how to calculate a labor rate and provide an example to illustrate it.

The formula to calculate a labor rate will be as follows:

Labor Rate = Total Labor Cost ÷ Number of Hours Worked

Total labor cost is the full amount a business pays for an employee, not just their wage, but also:

Payroll taxes (e.g., Social Security, Medicare, unemployment tax)

  • Employee benefits (e.g., health insurance, retirement contributions)
  • Paid time off (vacation, sick leave, holidays)
  • Training and onboarding costs
  • Work-related expenses (e.g., uniforms, tools, equipment, workspace)

Example:

Let’s say an employee works 160 hours in a month and the employer pays the following costs:

  • Base wage: $25/hour × 160 hours = $4,000
  • Payroll taxes & benefits: $800
  • Training & overhead: $200

Total Labor Cost = $4,000 + $800 + $200 = $5,000
Labor Rate = $5,000 ÷ 160 hours = $31.25/hour

Labor rate vs labor cost

To differentiate between labor rate and labor cost, let's look at their definitions:

  • Labor Rate is the per-hour cost of employing someone. It includes their wage plus any additional expenses such as taxes, benefits, and insurance.
  • Labor Cost is the total amount paid for labor over a period of time (weekly, monthly, or per project). It’s calculated by multiplying the labor rate by the number of hours worked.

Factors that influence labor rate

Labor rates are flexible, not static. Businesses don’t set rates in a vacuum. Instead, they react to:

  • Cost changes (e.g., minimum wage increases, rising healthcare premiums).
  • Market shifts (e.g., high demand for AI talent → rates surge).
  • Regulatory updates (e.g., new overtime rules → higher effective costs).
  • Project/client risks (e.g., complex work → premium pricing).

How TMetric helps you track labor rate and project costs accurately

TMetric helps you track labor rates and project costs accurately by allowing you to set custom hourly rates for each team member or contractor. As time is tracked in real time or entered manually, it’s automatically linked to specific tasks and projects. TMetric then calculates labor costs by multiplying hours worked by the assigned rates, providing a clear view of the project cost. In the Projects Summary report, you can see both billable information and costs.

Time Report

Frequently asked questions

What is included in labor rate?

A labor rate represents the total hourly cost of employing a worker. It includes the employee’s base wage plus additional expenses such as payroll taxes, benefits (e.g., health insurance, retirement contributions), paid time off, training costs, and some overhead. This rate gives a complete picture of what each hour of labor truly costs the employer.

How do I calculate labor rate for employees?

To calculate the labor rate for employees, divide the total labor cost by the total hours worked. Total labor cost includes the employee’s base wage plus additional expenses such as payroll taxes, benefits, and other related costs. For example, if an employee earns $25/hour and the employer pays an extra $5/hour in benefits and taxes, the labor rate would be $30/hour.

Is labor rate the same as wage?

No, labor rate isn’t the same as wage. Wage is just the employee’s pay, while labor rate includes wage plus taxes, benefits, and other costs to the employer.

How does labor rate differ from labor cost?

Labor rate is the cost per hour of employing someone, including wages, taxes, and benefits.
Labor cost is the total amount paid over time, like per week, month, or project.

Example:
If the labor rate is $30/hour and an employee works 40 hours, the labor cost is $1,200 for that period.

Can labor rates vary by project?

Yes, labor rates can vary by project. Businesses often assign different rates depending on the project's complexity, client, required skills, or billing agreement.

How do I configure labor cost tracking in TMetric?

To track labor costs in TMetric, first set each team member’s cost rate in Workspace → Members. Then, assign billable rates per project. Team members track time by project or task, and TMetric automatically calculates labor costs based on hours worked multiplied by cost rates. Use reports like Projects Summary to monitor costs, billable amounts, and budgets.

Does TMetric generate labor rate-based billing or payroll reports?

Yes, TMetric can generate reports based on labor rates. See the Projects Summary report for these purposes.

What’s the best way to calculate ROI based on labor tracked in TMetric?

You track labor hours and costs in TMetric, and then calculate ROI using the following formula:

ROI = (Revenue - Labor Costs) / Labor Costs × 100%

In the TMetric Projects Summary report, the billable amount represents project revenue, while labor costs are shown as costs.

How can TMetric help me stay within labor budgets on projects?

TMetric helps you stay within labor budgets by letting youset budgetlimits for each project. As your team tracks time, TMetric monitors labor costs in real time and sends alerts when you’re close to or exceeding the budget.