Labor Tracking & Payroll Allocation for Contractors

How to track labor by job, phase, and cost code — and calculate the TRUE labor cost that protects your profit.

Labor is the #1 reason contractors lose money on jobs.
Not materials.
Not subs.
Labor.

Most contractors think they “have a feel” for labor…
until we break hours down by phase and cost code and see where the job actually slipped.

This guide gives you a simple, scalable system for:

✔ Daily labor tracking
✔ Correct payroll allocation
✔ Accurate cost codes
✔ True labor cost (burden)
✔ Weekly labor vs estimate checks

This is the labor system profitable contractors use to stay ahead of overruns.

1. Why Labor Is the Most Important Part of Job Costing

Labor is where profit disappears because labor is:

• variable

• easy to underestimate

• often coded incorrectly

• influenced by crew efficiency

• rarely tracked by phase

Materials are predictable.
Subs are contracted.
Labor can quietly bleed margin without anyone noticing.

If labor isn’t tracked correctly:

• estimates stay inaccurate

• PMs lose control of job phases

• owners rely on “feel” instead of numbers

• profit leaks job after job

Pro Note: Weekly time entry is almost always inaccurate.
Daily time entry fixes most labor issues immediately.

Job Costing Basics for Contractors

2. The 3 Types of Labor Contractors Must Track

To understand real labor cost, break labor into three components:

A. Direct Labor

Hands-on work performed on the job.

B. Foreman / Supervision Labor

Time spent coordinating, managing, and solving problems.
Even though it’s not tool time, it is part of job cost.

C. Labor Burden

The extra costs on top of wages — payroll taxes, workers comp, insurance, PTO, and benefits.
This is why a $28/hr employee actually costs closer to $38–$45/hr.

Labor burden is one of the most commonly missed factors in contractor estimating.

3. Why Payroll Works Differently in Construction

Payroll in construction is not like payroll in retail or office-based businesses.
It’s more complex — and that complexity is exactly why contractors must track labor properly.

Here’s what makes construction payroll different:

• Payroll must be allocated by job
  Every hour worked needs to be assigned to a specific job for job costing to be accurate.

• Workers comp rates vary by trade
  Roofers, framers, painters, and laborers all carry different comp rates that affect labor cost.

• Foreman time belongs to job cost
  Supervision is part of delivering the job — not overhead.

• Employees often work multiple jobs in one day
  Hours must be split correctly or job costs become inaccurate.

• Overtime impacts profitability immediately
  OT increases true hourly cost and needs to be visible per job.

• Worker classification matters (W-2 vs 1099)
  If you control how, when, and where someone works, they are an employee — not a subcontractor.

This payroll complexity is why labor tracking and job costing must work together.

4. The Simple Daily Labor Tracking System

This is the labor tracking workflow I implement for contractors because it’s simple and scalable.

Step 1 — Foreman enters time daily

Daily = accurate
Weekly = guesses

Step 2 — Every hour is coded to:

• the job

• the phase (demo, rough-in, finish, etc.)

• the cost code (the label that tells accounting what the labor was for)

Step 3 — Foreman submits time to accounting daily

This keeps payroll aligned with job costing.

Step 4 — Weekly review

PM and accounting review:

• estimated vs actual labor

• phase performance

• overtime impact

• efficiency trends

• early warning signs

This is where most contractors finally see where labor is leaking.

5. Why You Must Track Labor by Phase (Not Just Job)

Tracking labor only at the job level (“112 total hours”) doesn’t tell you much.

You need phase-level visibility.

Example:
Trim estimate: 24 hours
Trim actual: 41 hours
17 hours lost — a 71% overrun

Without phase tracking, this repeats job after job.
With phase tracking, you correct estimating and staffing immediately.

See more information in How Early Job Setup Impacts Labor Performance (Before the First Hour Is Logged)

6. The Simple Labor Burden Method (Quick Estimate)

A fast, reliable way to estimate true labor cost:

Base Wage × 1.30–1.40 = True Hourly Cost

Example:
$28 × 1.35 = $37.80/hr

This keeps estimates realistic and protects your margin.

7. The Detailed Labor Burden Breakdown (For Precision)

For exact numbers, calculate:

• payroll taxes (~10–12%)

• workers comp rate by trade

• general liability allocation

• PTO and holidays

• health benefits

• small tools allowance

Most contractors land at 25–45% burden once everything is included.

If you don’t know your true hourly cost, you can’t bid accurately.

8. How to Allocate Labor to Jobs in Payroll

When payroll runs:

• hours must be assigned to the correct job

• hours must be assigned to the correct phase

• hours must be assigned to the correct cost code

Then apply:

Hours × True Hourly Cost = Actual Labor Cost

This shows real job profitability — not assumed profitability.

9. The Weekly Labor vs Estimate Check

This is where profit is protected.

Each week, PM and accounting compare:

• estimated hours

• actual hours

• phase performance

• labor variance

Variance: how far you are over or under the labor estimate.

Weekly checks prevent surprises.
Monthly checks are too late.

10. Common Labor Tracking Mistakes (and Fixes)

❌ Tracking labor weekly
✔ Fix: daily entries

❌ No cost codes
✔ Fix: simple cost code system

❌ Ignoring labor burden
✔ Fix: use a 1.35 multiplier

❌ Only tracking total hours
✔ Fix: track by phase and cost code

❌ No weekly review
✔ Fix: short weekly PM meeting

❌ Overcomplicating payroll
✔ Fix: simple systems scale

Additional Resources:

Vendor Invoice Tracking for Contractors

Labor Tracking & Payroll Allocation for Contractors

Job Costing Basics for Trades & Contractors

Contractor Invoice Approval Workflow

FAQ

What is labor burden?
All costs beyond wages — taxes, workers comp, insurance, PTO, and benefits.

Why is construction payroll different?
Because labor must be tied to jobs, comp rates vary by trade, and employees often work across multiple sites.

Why track labor daily?
Daily entries are accurate; weekly entries rely on memory.

Do I need payroll software?
Not at first. Simple daily logs work for most contractors.

How often should labor be reviewed?
Weekly — that’s where margin protection happens.

If you want help building a labor and payroll system that ties directly into job costing and profitability, this is one of the core operational setups I build for contractors inside EdgeStrat Finance. A strong labor workflow gives you visibility — before a job slips.

Explore our contractor accounting services

Disclaimer:
This content is for general educational purposes only and does not constitute tax, legal, or accounting advice. Individual circumstances vary, and tax and reporting requirements can change. Always consult a qualified CPA, tax professional, or legal advisor for guidance specific to your business.