How to Calculate Labor Cost in Construction
In this guide, you will learn how to calculate labor cost in construction. Estimating construction labor costs can be a daunting task with extreme pressure for the commercial estimator to get it right or face severe consequences. Working under pressure is right. The results of miscalculations producing an inaccurate quote or estimate can lead to many business outcomes, all bad – lost money and new business, lower profit margins, angry customers, and even employees quitting. Knowing how to calculate accurate quotes and estimates begins with understanding how to calculate labor costs in construction.
An excellent place to start on any construction project is to (1) find your Base Rate, then we’ll (2) determine the Labor Burden, (3) Labor Rate, and (4) Labor Cost. Now, you have a simple step by step understanding of how to calculate Labor Cost for Construction projects.
Table of Contents
STEP 1 – Base Rate
Overview: 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: $80 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 the following case example, your base rate is going to be $80 per hour.
STEP 2 – 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.
(1) Hourly Wage
(2) Number of hours available to work per year
(3) Number of days available for time off (vacation + sick days)
Example: A $40 per hour employee.
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 the Accounting Department will provide you with the yearly employee costs because you need to identify payroll taxes, training, insurance, and other benefits.
Here are some numbers we can plugin for this example:
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.
STEP 3 – 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 + Mark up (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.
STEP 4 – Labor Cost
The final step after understanding your Base Rate is to calculate the construction Labor Cost. In this exercise, 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.
Voila! 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 Calculate Labor Cost in Construction Using Technology
Adopting the best of breed software for commercial construction is not as difficult as it used to be. Creating estimates or quotes manually using spreadsheets or calculators is in an obsolete approach to delivering best in class business results. Leveraging software programs with set formulas will bring you more accurate estimates and quotes. Relying on phone calls to connect the office to the field is a strong indicator you’re not in touch with what the job site crew is doing every day. Using paper time cards means you’re losing money from duplicate data entry and human error.
There’s a simple solution that will increase accuracy and productivity for everyone on your team involved in construction project delivery (Design, Estimating, Project Management, Document Management, and Accounting). Best of breed cloud-based project management and document control software interfacing with estimating and accounting software as well as connected to field apps for the job site crew makes everyone’s job easier, more productive, and more profitable.
The Importance of Estimating Labor Costs Accurately in Construction.
You NEED accurate estimated construction quotes and labor costs in order to put in a realistic bid. The process of estimating is not about calculating the lowest possible bids and labor costs but calculating the most accurate and realistic ones. The construction industry is facing labor shortages that result in firms paying higher salaries to attract workers. There is also an increase in demand for materials, which results in unavoidable construction costs rising. In this guide, you know how to calculate construction labor costs, which gives bid writers and PMs the information they need to avoid falling below profit margins.
