Understanding and Computing Construction Labor Costs

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Understanding and Computing Construction Labor Costs

After we discussed some tips on how to make more accurate estimates before you go to bid, one of the things you’re probably wondering about now is how to compute labor costs, exactly. Well, it isn’t as difficult as it sounded when we advised you to have your project managers and foreman to join you in doing the bid as they are the only ones who can gauge your crew members’ working capabilities.

Here’s how it’s truly done:

When bidding on projects, it’s critical to understand your true labor costs. For most construction companies, employee compensation is the single largest expense — so even small errors in calculating labor rates can lead to substantially inaccurate estimates.

The results of miscalculations of construction labor cost can lead to an inaccurate quote or estimate. Consequently, this can lead to many business outcomes, and all are bad: there’s money loss and possibly new business shut down, lower profit margins, angry clients, and even employees quitting. Coming up with an accurate quote or estimates begins with computing construction labor costs. So in this guide, we will help you learn how to compute labor costs in construction.

Understanding Labor Costs


There are two keys to developing accurate labor rates. They are:

  • Factoring in all direct and indirect costs associated with an employee or class of employees
  • Accounting for the cost of nonproductive time.

An in addition to wages, employee costs include, but aren’t limited to:

  • State and federal payroll taxes
  • Vacation, sick days and other paid time off,
  • Employee benefits, including insurance
  • Bonuses and retirement plan contributions,
  • Workers’ compensation, liability and auto insurance,
  • Training expenses,
  • Job-related clothing, safety gear and tools, and
  • Company-provided vehicles, cell phones and tablets.

These are all the things you should consider when computing for the exact labor cost you are going to need to ask for a budget for. 

There were several elements that caused inaccurate estimates from materials and equipment cost to labor cost. The ending? No other client could trust their estimates in new bids.

There are numerous elements that must be built into any thorough cost estimation. The costs of the materials and equipment needed to complete the job are obvious considerations, but labor factors are also crucial to any project and can be one of the most significant costs involved. Hence, computing labor costs in construction by defining the total working hours is a crucial step in providing an accurate estimate. It’s also, arguably, one of the most difficult parts of creating an accurate estimate.

But in computing labor costs, there are some elements you should take into account so you can make a reasonable account of total work hours. Here they are:

1.Working out labor units

Smaller construction firms can ‘guesstimate’ the man-hours for a particular job of limited scope and can generally achieve a reasonable level of accuracy based on experience alone. However, once you get beyond a certain level of scale and complexity, this method is no longer adequate, and other, more detailed techniques must be used.

The most common way of working out labor calculations is to use labor units. These set out how long it takes to install each and every component across the entire project, from laying out the foundations to building walls, installing sections of circuit on the MEP (mechanical, electrical, plumbing) side, and the time taken to install each individual fixture and fitting. This requires a detailed quantitative take-off to be completed first, which will set out the requirements for each part of the job.

This can then be used in conjunction with labor rates for the different aspects of the job to produce a detailed labor cost estimate. Still, it’s not as simple as multiplying hours required by hourly rates. There are labor overheads and ‘non-productive’ hours to be taken into account, as well as numerous factors that can affect the costs, such as weather, illness, site conditions, and other means of productivity loss.

2.Factors to take into account

Once you have your basic figures, you will need to customize labor units based on the circumstances of the individual project.

When calculating how long it should take a worker to complete a particular part of the project ,it is not generally advisable to consider only peak productivity rates. These are the rates at which the work would be accomplished with everyone going ‘full steam ahead’ and no external factors slowing them down.

In reality, there are various factors that can have an impact on productivity. Working long hours can have repercussions, as well as increasing costs as workers slip into overtime rates.

According to the NECA Manual of Labor Units, working 10-hour days for five days a week can result in a productivity loss of 15% to 20% after six weeks, while 12-hour days could result in a loss as high as 35% to 40%. Weather can have a huge impact and, while freak weather cannot be accurately accounted for, allowances based on location and time of year should be factored into any estimation. The temperature, conditions of the job and any special requirements, such as the presence of hazardous materials, should also be taken into account.

In addition to external factors that can affect productivity, you will need to build certain overheads into your labor costs. The costs for part-time contractors who are engaged for certain parts of the job can be relatively simple to work out on an hourly basis. But for full-time employees, you should use annual rates divided down to produce any hourly figures. The project employers might not be explicitly responsible for paying for workers’ holiday, for example, but you might be – and annual costs directly affect the hourly costs that you pay your contracted employees.

Hard labor rates should also include all employer taxes and benefits provided, such as healthcare schemes and insurance.

3.Using planned productivity rates

A more generalized approach was proposed in the journal Building and Environment. This uses the productivity rates of contractors’ planning engineers for a ‘typical’ building type. It uses these figures to produce a ‘Labor Estimate Factor,’ which is defined as the hour requirements per square meter of the building’s gross floor area. It then calculates costs based on national average wage rates for the type of work involved in different parts of the project.

But this method produces a far less accurate estimation. The report’s authors say it can be used from inception, when design information is at a premium, to provide a cost estimate that should fall within 20% of the final cost of the project.

4.Using Gantt charts

Gantt charts can be a good tool to utilize in computing construction labor costs. These bar charts are actually used to visually represent a project schedule, typically showing the tasks that need to be performed sitting on the vertical axis while time intervals progress along the horizontal axis. This can be used to ensure that the job is staffed properly, meaning there is neither a lack of capacity nor productivity (from having too many skilled people sitting around doing nothing) at various parts of the project. In cost estimating terms, making sure you schedule your project management correctly can help you reduce your labor costs, allowing for a more competitive bid.

Overall, computing labor costs in construction is not about coming up with the lowest possible costs and bid but producing the most realistic and accurate one. That gives managers and bid writers the data they need to pursue contracts without putting themselves at risk of under-bidding and falling below acceptable margins in the process.

How to Compute Labor Costs

There are four things you need to define when deciding on labor costs to declare on your project bid. You have to find out about the following:

  • Base Rate
  • Labor Burden
  • Labor Rate
  • Labor Cost.

Now, you have a simple step by step understanding of how to calculate Labor Cost for Construction projects. Here are the more detailed steps on how to compute labor costs:

1.Define the Base Rate 

Your base rate is the unit cost that is established for construction labor. Construction materials and supplies are separate because they will always be different. First, begin with the size of your average crew or team when determining your base rate. In this example, we’ll go with a crew of three people.

The first employee is the Lead, the second is the Journeyman, and the third is an Apprentice. Each has a different pay rate that needs to be calculated into your base rate which is $80 per hour. 

  • Lead $40 per hour
  • Journeyman/Framer $25 per hour
  •  Apprentice $15 per hour

These wages are standard in the construction industry but can significantly vary based on trade specialty and geographic region across North America.

In our discussion, we will be using the base rate of $80 per hour. 

2.Determine Labor Burden

The cost of each employee (e.g., Lead, Journeyman, Apprentice) outside of their hourly wage is called Labor Burden. Also, the employee benefits paid by the construction company are necessary for calculating the labor burden. The formula for finding each employee’s labor burden is straight forward. Factors to consider are:

  • Hourly Wage 
  • Hours available to work per year
  • Days available for time off  (vacation + sick days)

We’ll use the Lead that earns $40 per hour and can work 2,080 hours per year. Everyone gets sick and is afforded vacation time, so, the Lead will be out for 15 days. Multiple 15 days (out) by 8 hours for a shift (this is adjustable) then subtract the total labor hours by 2,080 (hours per year). This will give the numbers they worked for the year.

Your financial records held in your Accounting Department will provide you with the yearly employee costs because you need to identify payroll taxes, training, insurance, and other benefits.

Now that you’ve determined the Labor Burden for the Lead employee, you’ll need to perform the same calculations for other members of the crew to determine the base rate for the entire team’s Base Rate for the project.

3.Calculate the Labor Rate

Once the crew’s Base Rate is determined, you need to calculate Labor Rate. Labor rate is merely adding the “hourly rates of employees” on the project. To get this number, you should multiply it by the Labor Burden and your “mark up.”

Formula Example: Hourly rates of employees (total) x Labor Burden + Markup (e.g., 20%)

Some resources suggest rounding up because a round number makes it easier to calculate in the future. Also, once you’ve gone through these exercises with different crews and combinations, keep the calculations on hand to help determine project labor costs with less effort. Remember, various projects will have variations.

4.Computing Labor Cost in Construction

The final step after understanding your Base Rate is to calculate the construction Labor Cost. In this part, you have three members of the crew working a 6-week project. They have 8-hour shifts, which ends up being a 40-hour workweek.

The formula above provides the calculation of the project’s construction Labor Cost. Now, you’re ready to add costs for other variables that change from project to project (e.g., materials, shipping, etc.).

 Preparedness leads to success. Having formulas ready will enable you to deliver estimates quicker, and more importantly, with greater accuracy in scheduling teams and resources. You’re now on your way to meeting your construction company’s financial goals. 

How to Compute Construction Labor Cost with Technology at Hand

There are free calculators available online that you can use to calculate labor costs. But using the software can help you come up with more informed/more accurate estimation. Using spreadsheets with formula is already obsolete. There is a software you can use now for making project estimates and you can leverage those as they are already set with formulas. All you need to do is to input your numbers.

In finding out factors to consider when computing labor costs, it is more reliable to use construction project software to look into time cards from previous projects. There, you can have a better idea of how much work hours are needed in the new project or how many days were spent idle because of unexpected events like weather disturbances.

The best cloud-based construction project management software like Pro Crew Schedule can be integrated with your accounting software to make the computation easier.

Conclusion

As we mentioned before, accurate or realistic estimates are critical in winning a project bid. It doesn’t mean that when you can offer a low bid, you will get the project. Clients have grown wiser, now looking into details on how you came up with the estimate. Have you declared the right materials costs? Have you computed your labor costs correctly? Is the budget feasible?

Write realistic quotes with the help of construction project software like Pro Crew Schedule and convince the client that you’ll deliver the project well while looking out for your crew members who deserve the right wage rate.

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