No it’s not location specific. It’s business 101
What you don’t realize is the cost for employees doesn’t stop at their hourly wage.
Agree COST doesn't stop at the hourly wage. However, that base wage rate is determined by outside factors like location, union or non-union, workforce availability or sparsity, specific skill levels, etc.
We have federal and state taxes, Medicare, social security, workers comp, insurance, etc and that’s just direct cost for said person.
Correct. This is called burdened labor. It varies widely from company to company with much of the variance being based on location (state laws), benefits packages offered (union or non-union really come into play here), insurance modifier rates, etc.
Generally speaking, I've seen about 35-40% on top of the hourly wage to cover all these burdens.
So for a guy I'd pay $20/hour, he really COSTS me about $27-28/hour depending on my actual burden.
We also have to account for replacing tools, trucks, buildings, advertising etc.
Generally speaking this is called overhead. On government contracts you are usually limited to around 10-15%. Private contracts you might be able to get more. FYI, Overhead is usually a separate line item that is calculated by percentage on T&M bids. On lump sum bids, you have the luxury to include actual costs on things you can foresee and then usually apply percentages or cost history for other less tangible items.
Wither overhead figured, you can then apply markup. Again, this varies widely and private contracts is typically more, but most government contracts limits markup to 10-20%. For lump sum quotes, the sky is the limit as long as the customer accepts your quote.
If you have a legal business billing out someone at $35 an hour they will not be around long. Or they’ll be threading water and can’t realize why.
Let's just assume an average worker makes $20/hour:
$20 base cost x 1.35 burden = $27/hour adj cost x 1.10 overhead = $29.70 x 1.10 markup = $32.67/hour
Granted that's the low side of the percentages and I'm not advocating everyone stays in business on 10% markups. Usually in government contracts where you break down time & materials you charge for every little thing possible. And if you are using a similar situation to charge for your equipment & materials, then yes, billing at $32.67/hour can keep you profitable.
How? Because once you figure 10% over total cost of all labor, equipment and material costs that is usually a good return on your labor risk. Especially when we consider materials are basically zero risk and the majority of the dollars on any project. Equipment can be more tricky depending if you own or rent, but either way you have real costs for equipment capitalization or outside rental charges.
What I pay an employee has no bearing on what they get billed out as.
In the above examples, what you pay an employee does have bearing. At least on T&M contracts, and probably moreso in the government sector than private sector. When doing lump sum contracts, your labor costs should be capped at $27/hour (with the fake example used above, and will certainly fail in specific models) in the above calculations and then once you determine final cost you can put whatever profit margin you want on the entire job. At least for a cost-plus perspective, where you add greed/profit at the end after you fully understand and analyze the costs & risks of the projects you are bidding and considering quoting.
Hands down, not every project is a 10% markup job. Some are much more as they are low volume, more complex & risky, no competition, etc. Others may have great volume, feels a need, has stiff competition, etc and may be taken for less.
