Fully Burdened Labor Rate

A fully burdened labor rate captures what an employee really costs an organization, not just what they are paid. Salary is only the starting point. Employers also pay for health insurance, retirement contributions, payroll taxes, paid leave and bonuses, and they provide laptops, software licenses, office space and management. The fully burdened rate adds all of these to the salary and expresses the total as a cost per hour or per year.

The fully burdened rate is essential for making fair comparisons and accurate cost estimates. Comparing an employee's salary with a contractor's hourly rate, or costing a project using salaries alone, understates the real cost of internal labor. For IT financial management, where labor is usually the largest cost, fully burdened rates underpin project costing, service costing, capitalization and decisions about building, buying or outsourcing.

Definition of Fully Burdened Labor Rate

A fully burdened labor rate is the base wage or salary of an employee plus all associated employment costs and an allocation of overhead, divided by productive hours if expressed hourly. It represents the full cost to the organization of one unit of that employee's time.

It builds on the concept of labor costs, adding a share of indirect costs so that the rate reflects the full cost of employing and equipping the person.

Components of the Rate

Direct employment costs include base salary, bonuses and incentives, employer payroll taxes, health and other insurance, retirement contributions and equity compensation. These are sometimes called the labor burden.

Overhead costs include equipment such as laptops and phones, software licenses, office space and facilities, training, recruiting, and a share of management and administrative support. Including these produces the fully burdened rate.

Some organizations distinguish a loaded rate, which includes employment costs only, from a fully burdened rate, which also includes overhead. The terms are sometimes used interchangeably, so it is important to state which costs are included.

Productive Hours

When expressed per hour, the fully burdened rate divides total annual cost by productive hours, not total paid hours. A full-time employee is paid for about 2,080 hours a year, but after vacation, holidays, sick leave and training, productive hours may be closer to 1,800 or fewer.

Using productive hours gives a more realistic hourly rate for costing projects and comparing with contractors, who are typically paid only for hours worked.

Some organizations further adjust for time spent on internal meetings and administration, depending on how the rate will be used.

Importance of Fully Burdened Labor Rates in IT Financial Management

Labor is the largest cost in most IT organizations. Using salary instead of the fully burdened rate understates the cost of internal work, sometimes by half or more.

That distortion affects many decisions, from sourcing and project approval to IT service costing and the rates used for IT chargeback. When internal labor looks cheaper than it is, organizations tend to overuse it and undervalue alternatives.

Consistent rates across the organization also make it possible to compare the cost of teams, services and projects on the same basis.

Build, Buy and Outsource Decisions

When comparing internal delivery with contractors, outsourcing or SaaS, the internal cost must include all the costs the organization would avoid by not employing the person. Comparing a contractor's $120 hourly rate with an employee's salary of $150,000, roughly $72 per paid hour, makes the employee look far cheaper than they really are.

Using the fully burdened rate, the comparison may look quite different. This matters for IT outsourcing decisions and for choosing between building and buying software.

The comparison should still consider other factors, such as knowledge retention, flexibility and quality, but it should start from accurate costs.

Project and Service Costing

Project budgets and service costs built on salaries alone understate the real cost of the work. Fully burdened rates give accurate project costs, unit costs and chargeback rates, which business units can compare with external alternatives.

For software capitalization, the rules generally allow direct employment costs to be capitalized but not general overhead, so organizations often maintain both a loaded rate for capitalization and a fully burdened rate for decision making.

Using the right rate for each purpose avoids both understating costs in decisions and overstating capitalized assets.