Contractor License Practice Exam

Which cost includes matching Social Security and Medicare contributions for employees?

1. Direct labor cost

2. Labor burden

3. Material cost

4. Overhead cost

The correct answer is: Labor burden

The correct answer is that labor burden includes the costs associated with employer obligations beyond just direct wages paid to employees. This includes matching Social Security and Medicare contributions, which are mandatory payroll taxes that employers must pay alongside their employees' contributions. Labor burden encompasses all related costs, such as health insurance, retirement benefits, and other employee-related expenses that contribute to the overall compensation package. It's critical for contractors to factor in these additional costs when calculating project budgets to ensure they have a comprehensive understanding of the total labor expenses involved. In contrast, direct labor cost refers only to the wages paid to workers directly engaged in the project and does not account for supplementary expenses. Material cost relates to the expenses for physical supplies required for the project, while overhead cost pertains to indirect costs related to running the business, such as utilities and office expenses, and does not include employee-specific costs like Social Security and Medicare contributions.