A contractor or builder must consider labor costs during a construction project since it can make a significant addition to overall building expenses. According to research conducted by Construction Labor Market Analyzer (CLMA), labor costs can cover 20% to 40 % of the total construction cost. Labor demand is also increasing in the construction industry. According to BLS records, non-government workers can earn $40.23 per hour, while government employees can earn $57.60 per hour. You must know the labor cost formula to accurately determine the total expense of construction. How to calculate labor costs in construction? Let’s explore this comprehensive guide and get the answers to your queries!
What is the Labor Cost of a Construction Project?
Labor cost is an expense that you invest in workers to complete your construction and building projects. The workers who help builders during construction projects are excavators, masons, painters, electricians plumbers, and other construction workers. One must know how to calculate labor costs to hit the construction budget on point.
Average Building Labor Rates
When we dive into the pool of the construction industry, multiple labor expenses can influence the overall project budget. Therefore, it is mandatory to overview these expenses properly. Let’s explore the average construction labor cost for different tasks recorded by the U.S. Bureau of Labor Statistics.
| Category of Building Labor | Means Hourly Rates |
|---|---|
| Foundation & Building Exterior | $19.65 |
| Non-residential Building | $21.48 |
| Specialty Contractors | $19.94 |
| Residential Building | $18.68 |
| Utility Systems | $20.98 |
Importance of Calculating Labor Cost in Construction Project
Can you invest money in a business without calculation? Not at all because you always focus on perfect outcomes and significant profit. Well, the calculation is also necessary when you hire labor for your construction project. A project may suffer due to over or underestimation of labor costs. Likewise, you might experience sudden expenses during the construction phase. Therefore, experts recommend calculating labor costs before starting any construction project using the labor cost formula. With an accurate estimation of labor costs, you can efficiently and flawlessly schedule, manage, and control all your construction activities.
What is Labor Cost Formula
The labor cost formula is a mathematical equation that experts use to calculate the total expense required to hire labor for a construction project. Here is the formula to calculate labor costs;
Labor Cost= Base Cost + Labor Burden + Inefficiencies x No. of Hours per Week x Project Length in Weeks
Let’s understand all these variables independently!
Base Cost
The starting mark to initiate calculating labor costs is the base point because you can modify it conveniently. It is actually the basic unit price that construction labor cost estimators fix for laborers. Well, you can calculate this expense by adding up the multiple costs involved in the project.
Let’s take an example! The cost of hiring 3 different workers is given below;
Foreman: $30/hr
Concrete Pourer: $28/hr
Framer: $25/hr
Base Cost= $30 + $28 + $25
Base Cost= $83/hr
So, the base cost in this scenario will be $83/hr.Labor Burden
With a worker’s contract, numerous expenses are associated including Federal Insurance Contributions Act (FICA), Federal Unemployment Act (FUTA), Medicare, and Social Security at the federal level, and the State Unemployment Tax Act (SUTA).Position Hourly Rate Labor Burden Concrete Pourer $28 $4.94 Foreman $30 $5.295 Framer $25 $4.4125 Additional Project Expense Calculation
Calculating labor costs for construction involves considering base rates, labor burden, and additional costs like General Liability and Worker’s Compensation. Do not forget to account for worker inefficiencies and add 70% of one hour’s wages to the daily base cost. For example, if the base rate is $83/hr, the additional cost for inefficiencies would be $7.2625/hr.Sum Up All Expenses
Now, add up all given expenses to calculate the final figure.
Base Cost: $83/hr
Labor Burden: $14.65/hr
Inefficiencies: $7.26/hr
If we assume 40 hours per week and 26 weeks
Total Labor Cost = ($83 + $14.65 + $7.26) x 40 x 26
Total Labor Cost = $109,109.40
| Item | Hourly Rate ($) | Hours/Week | Weeks | Total Cost ($) |
| Base Cost | $83 | 40 | 26 | $87,360 |
| Labor Burden | $14.65 | 40 | 26 | $15,324 |
| Inefficiencies | $7.26 | 40 | 26 | $7,616.80 |
| Total | – | – | – | $109,109.40 |
Automate Labor Cost Calculations
We are living in an era of technology and many tools and software are available for automatic operations. If you find all this calculation nothing more than a headache, explore the potential of automatic labor cost calculation. Time management and accounting software are available on the Internet for your convenience. You can freely use them and reduce the chances of human errors. Moreover, you do not need to add inconsistencies to your plan because the software will automatically consider everything perfectly. What benefits this accounting and timekeeping software can deliver?
- Prompt processing
- Efficient labor cost tracking
- Accurate time and budget management
Two Types of Labor Cost
When you calculate labor costs for your construction project, it is essential to consider the types of labor expenses so that you can manage everything efficiently. There are two types of labor costs: Direct and Indirect. Let’s explore both in detail!
Direct Labor Cost
Direct cost is the expanse of your workers that you pay them for their activities. Some professionals also consider it a Base Rate.Indirect Labor Cost
Indirect labor cost, on the other hand, is an expense other than an hourly wage. It includes payroll taxes, insurance, training, holiday and sickness pay, and other employee benefits.
Note: Labor Burden is actually the sum of both direct and indirect labor costs and sometimes it is given in percentage.
Labor burden (%) = Indirect costs / direct costs x 100
Methods to Calculate Construction Labor Cost
Construction activities are rapidly increasing in our society and it is the major reason behind raised labor costs. Professionals calculate accurate contractor price per hour or construction labor cost per square foot to keep the building project on track. There are three methods to calculate construction labor costs.
Unit Pricing Method
Unit price labor cost calculation method is the most common one among contractors and construction labor cost estimators. In this method, they calculate labor costs by multiplying the unit price (hourly rate) by the duration required to complete one unit.
As a contractor, you can utilize cost databases to obtain average pricing data to determine the bid price for a construction project. Start by calculating the direct labor cost by multiplying the hourly rate ($40 per worker) by the number of hours (12 hours). Then calculate material costs separately and add them to the total labor cost. Divide the total labor cost by the square footage to get the construction labor cost per square foot. Add this to your database for each item. Finally, factor in supervision, project duration, equipment, profit, and overhead to achieve your final bid price.Final Bid Price=(Labor Cost per Sq. Ft × Square Footage) + Other FactorsCost Component Calculation Direct Labor Cost Hourly Rate ($) x Hours of Work Material Cost Calculated separately based on material prices Total Direct Costs Direct Labor Cost + Material Cost Labor Cost per Sq. Ft Total Labor Cost / Square Footage Final Bid Price (Labor Cost per Sq. Ft x Square Footage) + Other Factors Square Foot Method
Square foot labor cost calculation method equips contractors with strategic benefits. It is also called a budget tool and can be used for last-minute calculations and for creating budget estimates. By using the square foot method, contractors can connect with engineers and architects for early budget pricing. The method enables them to prevent design changes later. The technique is quick, simple, and relies on historical data for estimates. Collecting data on average construction labor cost per square foot for different project types helps in improving future budget estimates.Rule of Two Method
As a contractor, the “rule of two” is a handy labor cost formula. Labor costs typically make up 40-50% of total project costs. To get an estimate, multiply labor costs by two and add 10% for contingency. Use a construction labor database if you do not know labor costs. Knowing project details well can help you adjust estimates for accuracy.
Factors You Must Consider During Labor Cost Calculation
One must consider the following factors when dealing with How to Calculate Labor Costs in Construction because they can significantly impact the overall labor cost.
Wages
It is the most obvious factor that every contractor considers while calculating labor costs. It is actually the total cost you pay to your laborers once they have completed their tasks. Whatever unit of time you use to calculate labor costs, always make sure that you hit an accurate and precise budget. Also, make sure that you use the same time unit for all calculations.Overhead
Many fresh contractors and estimators think that the utilities and rent are separate from labor costs. However, the reality is completely opposite. It is the overhead expanse that you must calculate while determining labor costs. Overhead expenses increase with the addition of workers to the labor team. The list of expenses that you must add in overhead cost is given below;Utilities
Equipment
MaintenanceProperty taxes
Office supplies
Cost of your physical workspaceRecruitment
Before hiring your first employee, you start utilizing labor costs. These include maintaining a website, promoting job listings, and participating in job fairs. The expenses for attracting a new employee, regardless of the role, are called cost-per-hire. To calculate this, add up all your internal and external recruiting costs. These may include job board fees, background checks, drug testing, career fair expenses, maintaining your careers page, and fees paid to recruiters.Employment Taxes
Whenever you hire labor for your construction project, you need to pay taxes to the government-interconnected sectors. These taxes include;
Federal income tax
Social Security
Medicare taxesBenefits & Health Insurance
Employee benefits are a significant expense, comprising around 30% of the $40.23 hourly employee cost.. When you have more employees, the cost per employee for benefits tends to decrease. These benefits include health insurance premiums, employer retirement contributions, retirement program fees, paid time off, and additional pay like overtime. Considering all these factors is essential in calculating your total benefits expenses.
Additional Labor Costs to Consider
Not only the above-mentioned expenses affect the labor cost, but, you must also consider seasonal fluctuations and their impact, the need for temporary labor, and holiday bonuses. If you are hiring a freelancer for construction estimating services, designing, architecture, etc., also add them to your labor cost chart.
Why Accuracy is Essential in Labor Costs Calculation
When someone calculates labor costs for a construction project, he must emphasize its preciseness and accuracy because these two attributes create a key to open a door to project success. It is mandatory because only those companies survive in the construction industry that always equips their clients with reliable labor costs and building estimates. Accurate and comprehensive labor costs and construction estimates enable contractors to plan and manage their projects efficiently. It also helps contractors in winning more and more bids from their clients. Above all, it enables you to execute your construction projects with 100% efficient and reliable outcomes.
4 Tips to Reduce Construction Labor Cost
1. Go Paperless
When you go paperless, you can do your work more efficiently with the need for less labor. You can manage and control all construction activities from your office. Likewise, you would not need to deal with bundles of documents. Also, you will get updates immediately after the task has been done. The paperless approach enables your foreman to upload the latest photos on the dashboard so that you get updates on time and track production perfectly. Above all, there will be no need to review lengthy budget sheets daily to make updates according to current scenarios.
2. Reduce Turnover
On average, construction labor can earn $19.40 per hour. Therefore, an owner does not need to increase money from any side. Even, there is no need for overtime. Try to engage potential workers by offering competitive benefits. You can also offer your old workers PTO or incentive-based bonuses. You can also increase your profit and cut down labor costs by selecting labor with extraordinary expertise and working abilities.
3. Streamline Workflow Charts
Another way to reduce construction labor cost is by properly streamlining your workflow charts. Only creating a perfect chart is not a game but you also need to implement your strategies to get fruitful outcomes. Your chart must be easy to understand and maintain on a daily basis. It must show which labor is best for which phase of construction. Moreover, the timelines to perfectly complete a task must be clearly mentioned in it. Once a task has been completed, update the sheet and get feedback from supervisors.
4. Estimate Costs from the Onset
When you calculate the labor cost of the first project, you remain confused about what would be its results. But, once you have made a sample, you can more efficiently manage things in the following projects. For instance, you can assess whether your strategy was successful in the previous project or if you need to modify it. Moreover, you can cover the mistakes and errors you made in your first estimation project. Remember to keep your services flexible so that you can negotiate with your clients and deliver them the best results at the end of the day.
Get the Assistance of Professionals For Labor Cost Estimation
Whether you are a contractor or a builder, you can get assistance from professional construction labor cost estimators. They offer precise and comprehensive building estimating services to contractors. With their experts support, you can determine How to Estimate Building Construction Costs and labor expenses required for the project. They can furnish you with unlimited benefits.
- Increase in profit margins
- More chances of winning bid
- Boost in business growth rate
- Reduction in overhead expenses
- Surety of accurate and precise estimates
- More opportunities to save money and time
How to Locate Trustworthy Estimating Partners for Calculating Labor Cost?
Many construction estimating companies are working in the industry. But, everyone wants the perfect firm for accurate and precise estimating services. If you are one of them and searching for reliable estimating partners, follow our below suggestions;
- Research the market rates
- Look for solid expertise and skills
- Request bids from multiple estimators
- Check how experienced your estimator is
- Scan the previous projects your estimator has done
- Choose high-quality and reasonable service provider
- Ask him what method he is using for estimation & labor cost calculation
Bottom Line
Labor cost play an important role in the success of any construction project. It can significantly disturb your schedule and planning if you do not manage it properly. Therefore, it is mandatory to hit accurate and precise labor costs before starting work on any construction project. To get reliable cost expense, you must know How to Calculate Labor Costs in Construction. However, if you are unable to determine labor costs, you can get assistance from professional estimators. They will furnish you with a detailed budget sheet containing labor costs and other construction expense details. Remember to choose the best estimator to hit accurate figures and keep your construction project on a smooth track!
FAQ
Which is the best company for labor cost estimation?
If you are searching for a reliable and trustworthy company for labor cost estimation, you must contact the professionals of AU Nedes Estimating. We have been delivering precise and accurate estimates for many years. Trust us to bring your construction projects to the next level!
What are the common tools and software used in the construction estimation industry?
The tools and software that are common in the construction estimation industry include;
- Xactimate
- Quest
- RS Means
- Fast Pipe
- Fast Duct
- Bluebeam
- Trimble
- Plan Swift
How much a construction labor can earn per year in Australia?
Construction labor earning in Australia varies depending on working experience. Fresh labor can earn $57,304 per year. After gaining some years of experience, your income will raise to $60,431 per year. Once you have become well-experienced as a laborer, your salary will become $73,125 per year.
