How to calculate an Internal / Burden Labor Rate

Overview

This article covers information on how an Internal / Burden Labor Rate can be calculated for your Dealership in order to use on Internal Work Orders for services your Dealership is paying for.

Why Calculate an Internal / Burden Labor Rate?

The internal / burden labor rate accounts for both direct and indirect costs associated with employing technicians. This rate helps in:

• Accurate Job Costing – Ensures Internal service work is accounts for all costs involved with your technicians.
• Financial Planning – Helps set appropriate labor rates for internal work and can be used as a guide for external billing.

How to Calculate an Internal / Burden Labor Rate?

Determine Direct Labor Costs

Direct Labor Costs includes wages and benefits paid directly to technicians.  Those direct costs can include but are not limited to the following list;

• Hourly Wage per Technician = Base Pay
• Payroll Taxes = FICA, Medicare, state taxes
• Health Insurance = Employer contributions
• Retirement Benefits = 401(k) matching
• Paid Time Off = Vacation, sick days, holidays

Formula for Direct Labor Cost per Hour (DLCH):

DLCH = Total Annual Direct Labor Costs / Total Annual Hours Worked

Determine Indirect/Burden Costs

Indirect / Burden Costs are not wages or benefits paid to the technician but rather others costs that are associated with providing what the Technician needs to perform their work.  Those Costs can include but are not limited to the following; 

• Shop Supplies & Tools – Common consumables used for repairs
• Training & Certification – Technician skill development
• Service Department Overhead – Rent, utilities, insurance, admin salaries
• Equipment Depreciation – Lifts, diagnostic tools, IT systems

Formula for Burden Cost per Hour (BCH):

BCH = Total Annual Indirect Costs / Total Annual Hours Worked 

Calculate the Internal Burden Labor Rate

Internal / Burden Labor Rate =DLCH+BCH

This represents the true cost per hour of employing a technician.

Example Calculation (Per Technician)

Assuming:

• Direct labor costs = $60,000/year
• Indirect costs = $15,000/year
• Hours worked = 2,000 per year

DLCH = 60,000 / 2,000 =30.00

BCH = 15,000 / 2,000 = 7.50

Internal / Burden Labor Rate = 30.00+ 7.50 = 37.50 per hour