Contractors need to go the extra mile to calculate labor cost because it cover a large portion of the project budget. Just like materials, various factors need to be considered for estimating labor expenses. A minor mistake in the calculation results in compliance penalties. That is why we have prepared this guide for busy contractors to prevent mistakes. We will discuss the step-by-step labor cost estimation process to determine the true, fully burdened labor cost accurately. This will guarantee that your bid is profitable and every project stays on budget.
However, labor costs cover almost 20-40% of total project costs. There is no room for error in calculating labor costs. If you want to maintain your profit margins, you need to be very careful to Calculate Labor Cost in the Construction sector.
LEARN THE STEP-BY-STEP PROCESS TO CALCULATE LABOR COST AND ENSURE EVERY BID YOU SUBMIT IS ACCURATELY PRICED FOR MAXIMUM PROFITABILITY!
Construction Labor Costs Overview
Construction labor costs are not only about the total hours required. It also includes direct and indirect expenses, which must be included in the construction labor cost evaluation. Direct Labor Costs include base hourly wages, wages for workers directly involved in construction activities, and Contractor compensation.
However, indirect Labor Costs include administrative and supervisory salaries, project manager compensation, training and safety programs, and onboarding expenses. Now, let us give you an idea of the labor burden rate.
Labor Burden Rate
While evaluating labor expenses, you also need to calculate the labor burden rate. So what is this burden rate? This metric expresses total indirect labor costs as a percentage of direct labor costs.
According to current industry standards, labor burden rates fall between 30% to 40% for non-union contractors, and can reach 60% to 70% for union contractors.
What’s Included in Labor Burden?
The labor burden encompasses all additional costs beyond base wages:
Mandatory Costs
- Federal payroll taxes
- Federal unemployment tax
- State unemployment taxes
- Workers’ insurance
Benefits and Perks
- Health and vision insurance
- Life insurance
- Retirement plan contributions
- Bonuses
- profit-sharing programs
Operational Expenses
- Company-provided vehicles and maintenance
- Mobile phones and tablets
- Tools and small equipment
- Training programs and certifications
Step-by-Step Calculation Methods
Method 1: Detailed Estimating
- Pouring a concrete foundation
- Framing walls
- Installing electrical systems
- Plumbing installation
- Roofing
The next step is to estimate labor hours for every task. It must be based on historical data from similar projects and expertise.
Now, you need to examine the hourly rates and calculate the hourly rate for each worker type. After that, add your labor burden rate to get the exact hourly cost.
Formula:
Burdened Rate = Base Wage + (Base Wage × Labor Burden Rate)
Now, Calculate the Total Labor Cost
Total Labor Cost =
Burdened Rate × Hours Required × Number of Workers
However, it is not finished here. You also have to add contingency to overcome construction challenges due to bad weather or any other factor. However, add a contingency of about 10-20% to overcome:
- Weather delays
- Material shortages
- Design changes
- Overtime requirements
- Learning curves with new workers
Method 2: Labor Cost Percentage Method
This method is best for preliminary estimates or smaller projects. This method is considered the fastest, but it is less accurate.
The formula is:
Labor Ratio =
(Total Labor Cost ÷ Total Project Cost) × 100%
Method 3: Unit Rate Method
This approach is ideal for standardized or repetitive work.
Total Labor Cost =
Unit Price (hourly rate) × Time per Unit × Number of Units
Calculating Your Labor Burden Rate
Calculate Annual Base Wages
Annual Base Wages = Hourly Rate × 2,080 hours
However, check this every 6 months
Calculate Total Indirect Costs
- Payroll taxes
- Workers’ compensation
- Health insurance
- Vacation/holidays
- Training
- Equipment/tools
Calculate Labor Burden Rate
Labor Burden Rate =
(Total Indirect Costs ÷ Annual Base Wages) × 100%
Calculate True Hourly Cost
True Hourly Cost =
(Annual Base Wages + Total Indirect Costs) ÷ Productive Hours
Tips for Reducing Labor Costs Without Compromising Quality
- Invest in training for skilled workers to complete tasks more efficiently and with fewer errors.
- You need to overcome waste factors to improve efficiency.
- Track and analyze labor data because this will help improve the results.
- Maintain proper timelines because it reduces overtime.
- Using advanced construction management software improves coordination and reduces delays
Conclusion
Follow all the guidelines given in this guide to calculate labor cost in construction. Use proper methods and regularly update the figures to win bids and secure profits. It is highly recommended to hire a reliable construction estimating company to grow your business. With accurate labor estimations, you can attract clients.