The Silent Profit Killer Most Small Business Owners Never See Coming
You're quoting jobs based on your hourly labor rate. Your technician makes $35/hour, so you charge $75/hour. Simple math. Healthy margin.
Wrong.
That $35/hour is just base pay. Your true labor cost is probably $55–$65/hour when you add taxes, benefits, insurance, overhead, and equipment. You think you're making $40/hour profit. You're actually losing money on every job.
This is the Fully Burdened Labor Rate (FBLR) blind spot. 80% of service businesses underprice because they don't know their FBLR. They chase volume to make up for thin margins, hire more staff, and dig the hole deeper.
This article reveals what FBLR really is, why it matters, and the 5 deadly mistakes that destroy profitability.
What Fully Burdened Labor Rate Actually Means
FBLR = Total true hourly cost of employing someone.
Not just their paycheck. Every cost associated with that employee.
The Formula
FBLR = (Base Pay + Payroll Taxes + Benefits + Insurance + PTO + Overhead + Equipment) ÷ Billable Hours
Example: Your $35/hour Technician
| Cost Category | Annual Cost | Hourly (2080 hrs) |
|---|---|---|
| Base Pay | $72,800 | $35.00 |
| Payroll Taxes (15%) | $10,920 | $5.25 |
| Workers Comp (5%) | $3,640 | $1.75 |
| Health Insurance | $12,000 | $5.77 |
| PTO (2 weeks) | $5,600 | $2.69 |
| Training/Tools | $2,000 | $0.96 |
| Overhead Allocation | $10,400 | $5.00 |
| Total FBLR | $117,360 | $56.42 |
You thought labor cost $35/hour. Reality: $56.42/hour.
To make $20/hour true profit, you need to charge $76.42/hour minimum. Most charge $65–$70. They're losing $6–$11/hour on every job.
Why FBLR Is Your Business's Most Important Number
#1: Accurate Pricing = Profitability
Underestimating FBLR = underpricing every job. A $10,000 project at "perceived" $35/hour labor = 286 hours budgeted. Reality: 208 hours at true $56.42 FBLR = $11,735 labor cost.
You lose $1,735 before materials. Multiply by 12 projects/month = $20,820/month lost profit. Over 10 years: $2.5 million destroyed.
#2: Capacity Planning
FBLR reveals your true capacity. You think you have 8 billable hours/day per tech. Reality: 6 hours after PTO, training, admin. Your capacity is 25% lower than you think. Schedule accordingly or overcommit and lose money.
#3: Hiring Decisions
Hiring based on base pay = disaster. You hire a $30/hour tech to "save money." Their FBLR = $48/hour. Your $25/hour tech FBLR = $42/hour. New hire costs 14% more. Factor FBLR before every hire.
#4: Profitability By Customer/Project
FBLR reveals which customers/projects lose money. Discount customer: "20% off" sounds nice. At true FBLR, you're losing $15/hour. Fixed-price projects: FBLR shows if scope creep kills margins. Know FBLR = know true profitability.
#5: Competitive Bidding
Bid too low = lose money. Bid too high = lose jobs. FBLR gives you the minimum viable bid. Bid confidently knowing you're profitable.
The 5 Deadly FBLR Mistakes Small Business Owners Make
Using Base Pay as Labor Cost (80% Make This Error)
The Problem: "My tech makes $35/hour, so labor costs $35/hour."
Reality: FBLR = $56/hour. You're pricing 37% too low.
Result: Every job loses money. You work harder for less profit.
Ignoring Non-Payroll Costs
The Problem: "Benefits? Overhead? That's not labor."
Reality: Workers comp, insurance, equipment = 30–50% of base pay.
Example: $35 tech. Workers comp alone = $5.25/hour. Uninsured risk or underpricing?
Fix: Build full FBLR spreadsheet. Review annually.
Assuming 100% Billable Hours
The Problem: "Tech works 40 hours/week = 40 billable hours."
Reality: Billable = 75% max (PTO, training, admin, travel, no-shows).
$35/hour base × 75% = $26.25 true billable rate. FBLR = $42/hour.
Fix: Track actual billable utilization. Budget realistically.
Static FBLR (Never Updating)
The Problem: Calculated FBLR 3 years ago. Never updated.
Reality: Insurance up 20%. Benefits up 15%. Wages up 10%.
Old FBLR $50/hour. New reality $65/hour.
Fix: Recalculate FBLR every payroll cycle or quarterly.
No FBLR By Role/Skill Level
The Problem: "All techs same rate."
Reality: Senior tech FBLR = $65/hour. Junior = $45/hour.
Pricing senior work at junior rates = profit killer.
Fix: FBLR by role: Junior, Mid, Senior, Specialist.
How to Calculate Your FBLR (Step-by-Step)
Gather Annual Costs Per Employee
Direct Costs
- Base Pay: $72,800
- Payroll Taxes (15%): $10,920
- Workers Comp (5%): $3,640
Benefits
- Health Insurance: $12,000
- PTO (80 hrs @ $35): $2,800
- Training: $2,000
Indirect
- Equipment/Tools: $4,000
- Vehicle Allocation: $3,200
- Overhead (10%): $7,280
Calculate Billable Hours
2,080 total hours
− PTO: 80 hours
− Training: 80 hours
− Admin/Non-billable: 320 hours
= Billable Hours: 1,600 hours
FBLR Formula
Total Cost: $117,840
÷ Billable Hours: 1,600
FBLR = $73.65/hour
Pricing Rule
FBLR × Desired Margin (2.5x–3x) = Minimum Bill Rate
$73.65 × 2.5 = $184/hour minimum
Most charge $125–$150. Losing $34–$59/hour.
FBLR By Business Type (Benchmarks)
Service Businesses
HVAC, Plumbing, Electrical
Bill Rate: 2.5x FBLR minimum
Consulting/Professional
Professional Services
Bill Rate: 3x FBLR
Manufacturing/Production
Add equipment depreciation, facility allocation
FBLR typically 1.8–2.2x base pay.
Actionable FBLR Implementation Plan
Calculate Current FBLR
- Export payroll last 12 months
- List all employee costs (taxes, benefits, insurance)
- Allocate overhead (rent, utilities ÷ employees)
- Calculate by role
- Shock: Your true labor cost
Adjust Pricing
- Service rates: FBLR × 2.5 minimum
- Fixed bids: Hours × FBLR + 25% margin
- Discounts: Never below 2x FBLR
- Communicate: "Adjusted rates reflect true value"
Capacity & Scheduling
- Billable hours reality (75% max)
- Schedule based on true capacity
- Hire based on FBLR affordability
Monitor & Optimize
- Track actual vs. FBLR costs weekly
- Customer profitability (revenue ÷ FBLR hours)
- Quarterly FBLR recalculation
The FBLR Transformation
Before FBLR
- ❌ Pricing by gut feel
- ❌ Thin margins
- ❌ Volume chase
- ❌ Constant stress
After FBLR
- ✅ Pricing confidence (FBLR × margin)
- ✅ True profitability visibility
- ✅ Capacity realism
- ✅ Hiring discipline
- ✅ Customer profitability analysis
Real-World Impact
A $1M service business discovers FBLR $58 vs. perceived $35.
Current pricing
$75/hr (17% margin)
New pricing
$165/hr (65% margin on FBLR)
Annual impact: $230K additional profit
FBLR isn't accounting. It's your profitability operating system.
Disclaimer: The examples and calculations in this article are illustrative and based on typical small business scenarios. Actual Fully Burdened Labor Rates vary by industry, location, and business specifics. All financial decisions, pricing strategies, and cost analyses should be reviewed and validated by qualified financial professionals or accountants familiar with your business.
Don't Let Hidden Labor Costs Drain Your Profits
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