Labor Cost Percentage: How Much of Revenue Should Go to Labor?
Labor cost percentage is your loaded labor cost divided by the revenue that labor produced, times 100. If your crews cost $24,750 in a month, including payroll taxes, workers' comp, and insurance, and the work they did invoiced $60,000, your labor cost percentage is 41%. For most service businesses, field labor lands somewhere between about 25% and 45% of revenue depending on the trade — but the useful number is not an industry average. It is your own figure, measured the same way every month, from hours your crews actually worked. CRMb ties punched crew hours to real jobs, so the labor side of that division is a record, not an estimate.
Labor is the largest cost most service businesses carry, and the one that moves the most from week to week. Materials are priced on a receipt. Rent is fixed. Labor drifts: a job runs long, a crew drives across town twice, a callback eats a Friday. Labor cost percentage is the single ratio that shows whether that drift is eating the business.
The formula
Labor cost percentage = loaded labor cost ÷ revenue × 100
Two words in that formula do most of the work.
Loaded means the full cost of an hour, not the wage. Add employer payroll taxes, workers' comp, liability insurance tied to payroll, paid time off, and any benefits. A $22 wage commonly costs $27 to $30 an hour once it is loaded. Use the wage alone and every percentage you calculate will look better than reality. See how to calculate labor burden rate for the full build-up.
Revenue means the revenue the labor produced in the same period. Match the months. Labor punched in September divided by revenue invoiced in September. If you invoice on completion and jobs span month-end, the ratio will swing; trend it over a rolling three months to smooth that out.
Direct labor vs total labor
There are two versions of the number, and mixing them is the most common reason owners argue with their own spreadsheets.
- Direct (field) labor percentage counts only the people doing the work: technicians, crew members, crew leads on the tools. This is the version that tells you whether jobs are priced and run well.
- Total labor percentage adds office staff, estimators, dispatchers, and owner salary. This is closer to a business-health number, and it belongs next to your overhead rate, not your job pricing.
Use direct labor for pricing and crew decisions. Use total labor when you are deciding whether you can afford another office hire. Every benchmark in this post refers to direct field labor.
What percentage of revenue should go to labor?
The honest answer depends on how much of your invoice is materials. A trade that resells a lot of equipment and parts will show a lower labor percentage than one that sells almost nothing but time, even if both run equally well.
Rough ranges you will hear for direct field labor, which vary by region, crew mix, and pricing model:
| Business type | Rough direct labor range | Why |
|---|---|---|
| Residential and commercial cleaning | 40% to 55% | Almost all time, very little material |
| Landscape maintenance | 30% to 40% | Mostly time, some plants, mulch, and fuel |
| Painting | 30% to 40% | Labor-heavy, paint is a modest share |
| Plumbing and electrical service | 20% to 35% | Parts and fixtures carry a real share of the invoice |
| HVAC replacement and install | 15% to 30% | Equipment is a large share of each ticket |
| General contracting and remodel | 20% to 35% | Materials and subs dilute labor's share |
Treat these as a sanity check, not a target to copy. The target that matters is the one your own prices can support, and it comes from working backward from margin.
Setting your own target
Start from the gross margin you need and the other costs on a typical job.
- Pick the gross margin you need. Gross margin has to cover overhead and leave a profit. If overhead runs 20% of revenue and you want 10% net, you need about 30% gross margin at minimum. See gross profit vs net profit.
- Subtract your typical materials and subcontractor share. If materials and subs average 30% of revenue on your jobs, that leaves 70%.
- What is left is your labor ceiling. 70% − 30% gross margin = 40% maximum labor. Run above that and the job cannot cover overhead and profit at the price you charged.
Then set the working target a few points under the ceiling. Jobs run long. A target at the ceiling means one bad week puts you under water.
A worked example: finding six points of margin in the hours
A landscape maintenance company with three crews closes the month.
| Line | Amount |
|---|---|
| Revenue invoiced | $60,000 |
| Field hours punched | 900 |
| Loaded cost per hour ($22 wage + 25% burden) | $27.50 |
| Loaded field labor | $24,750 |
| Labor cost percentage | 41.3% |
Their target is 36%. They are more than five points over, which on $60,000 is about $3,150 a month of margin that never arrived.
The ratio alone does not say why. The hours do. Sorted by where they were actually spent, the 900 hours break down like this:
| Where the hours went | Hours | Loaded cost |
|---|---|---|
| Billable work on properties | 690 | $18,975 |
| Drive time between properties | 130 | $3,575 |
| Callbacks and rework | 45 | $1,237 |
| Yard, loading, and shop time | 35 | $963 |
| Total | 900 | $24,750 |
Two fixes, neither of which involves working the crews harder:
- Tighter routes. Re-clustering the schedule by area cuts drive time from 130 hours to 80.
- Fewer callbacks. A closeout photo check before the crew leaves each property cuts rework from 45 hours to 15.
That removes 80 hours. The month now costs 820 × $27.50 = $22,550 in labor, and the ratio drops to 37.6%.
Then pricing. Several recurring accounts had not been repriced in two years. A modest increase on those accounts lifts monthly revenue by 6%, to $63,600. The ratio is now $22,550 ÷ $63,600 = 35.5%, under target.
Gross profit before materials went from $35,250 to $41,050: $5,800 more a month, from the same three crews. None of it was visible from the revenue line or the payroll line on their own. It showed up only when the two were divided, and the hours were broken out by where they went.
Why the number runs high
When labor cost percentage climbs, it is almost always one of five things.
Estimates are low. The job was quoted at 20 crew-hours and took 26. Every job that runs long pushes the ratio up. The fix is measuring real hours per job type and quoting from them. See how to estimate labor hours for a job.
Unbilled time is growing. Drive time, loading, waiting on materials, and shop time are real paid hours that invoice to no one. If they are not priced into the job or charged separately, they land on labor percentage. See how to charge for drive time.
Overtime. Time-and-a-half hours cost 50% more but invoice the same. A crew that runs 10 hours of overtime a week is quietly raising your ratio every week. See how to control overtime costs on jobs.
Callbacks and warranty work. Rework is paid labor with no revenue attached. Track it as its own cost so it cannot hide inside the original job. See how to track callback and warranty costs.
Prices have not kept up with wages. If you gave raises this year and did not adjust prices, the ratio rose by exactly the size of the raise. See how to raise your prices without losing customers.
Why the number can run too low
A very low labor percentage is not automatically good news.
- Material-heavy months distort it. A month with two large equipment installs will show a low ratio even if the crews had an average month. Watch labor percentage alongside revenue per crew hour, calculated after materials.
- Unrecorded hours. If crews work through lunch, start early, or finish paperwork at home off the clock, the payroll line is understated and the ratio looks healthier than it is. It is also a wage-and-hour problem. Accurate punches protect both the business and the crew.
- Understaffing. A ratio well under your range can mean the crew is stretched and quality is slipping. That shows up later as callbacks and lost accounts.
Measure it per job, not only per month
The monthly ratio tells you whether there is a problem. The per-job ratio tells you where.
For each completed job, divide the loaded labor on that job by the job's invoiced amount. Sort the list. The jobs at the top are the ones to look at: a job type you consistently underestimate, a client whose site always takes longer, or a crew that runs slower on a particular kind of work.
This is the same discipline as job costing, narrowed to the biggest line. It works only if hours are recorded against the job they were spent on. A timesheet that says "40 hours, various jobs" cannot produce a per-job ratio, and a spreadsheet that has to be reconciled by hand every week tends to stop getting reconciled. See job costing spreadsheet vs software.
Checking the ratio while a job is still open, not after it closes, is what lets you act on it. See how to catch a job going over budget.
Labor cost percentage vs related numbers
Several metrics describe the same labor from different angles. Each answers a different question.
| Metric | Question it answers |
|---|---|
| Labor cost percentage | What share of revenue is going to labor? |
| Crew utilization rate | What share of paid hours were billable? |
| Revenue per crew hour | How much revenue does each hour produce? |
| Labor cost per job | What did this job's labor actually cost? |
| Job profit margin | Did this job make money after every cost? |
Labor cost percentage is the one to put at the top of a monthly review, because it moves first. Utilization and revenue per crew hour explain why it moved.
Frequently Asked Questions
How do you calculate labor cost percentage?
Divide your loaded labor cost for a period by the revenue that labor produced in the same period, then multiply by 100. Loaded labor includes wages plus employer payroll taxes, workers' comp, insurance, paid time off, and benefits. $24,750 of loaded labor against $60,000 of revenue is a 41.3% labor cost percentage.
What is a good labor cost percentage for a service business?
It depends on how much of your invoice is materials. Time-heavy businesses like cleaning often run 40% to 55% direct labor, landscape maintenance and painting around 30% to 40%, and parts-heavy trades like plumbing, electrical, and HVAC lower. A good number is one that leaves enough gross margin to cover your overhead and profit at your current prices.
What percentage of revenue should go to labor?
Work backward from margin. Start at 100%, subtract your typical materials and subcontractor share, then subtract the gross margin you need. With 30% materials and a 30% gross margin target, labor can take at most 40% of revenue. Set your working target a few points under that ceiling.
Should labor cost percentage include the owner's pay?
For direct labor percentage, include the owner's hours only when the owner is on the tools doing billable work, costed at the rate you would pay someone else to do it. Owner salary for running the business belongs in total labor percentage and overhead, not in the job-level number.
Is labor cost percentage the same as labor cost ratio?
Yes. Labor cost ratio, labor cost as a percentage of sales, and labor percentage all describe the same calculation: labor cost divided by revenue. Some businesses express it as a decimal (0.41) rather than a percentage (41%).
How can I lower my labor cost percentage without cutting wages?
Reduce hours that invoice to no one, and price the hours that do. Tighten routes to cut drive time, reduce callbacks with a closeout check, control overtime, quote from measured job times instead of guesses, and raise prices on accounts that have not kept pace with your wages. In most shops, the unbilled hours are where the points are.
How often should I check labor cost percentage?
Monthly for the business as a whole, trended over a rolling three months so timing swings do not mislead you. Per job whenever a job closes, and on long jobs while they are still open, so you can correct course before the job finishes over budget.
Getting started with CRMb
Pull last month's loaded field labor and last month's invoiced revenue, divide one by the other, and write the number down. Then do the same for your ten most recent jobs. The gap between your best and worst job is usually more instructive than the monthly average.
CRMb runs clients, scheduling, quotes, invoicing, and job costing on one system. Crew hours punched in Punch flow straight into each job's labor cost, so labor on every job reflects the hours your crews actually worked, and the capacity view shows how full each crew's schedule is before the month closes. It runs on Mac, iPad, and the web. Start your 14-day free trial and see your labor cost percentage from real hours.