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Labor costing in construction

What is labor cost in construction? #

Labor cost is the amount of money a contractor has had to pay to have her/his workers complete a job. True labor cost is more than just the hourly wage you pay; it should also include labor burden. Labor burden entails the full cost that an employee incurs on the business by taking into account cost of wages, benefits, taxes, workers compensation, insurance, empoyer specific taxes (FICA), and other labor-related expenses. All combined these account for a workers full labor burden. Labor costing in construction is often calculated without taking into account full labor burden. We at Knowify strongly encourage contractors to determine their labor using fully-burdened labor rates.

Labor costing is a central part of overall cost management for any business but even more so in the construction industry. It’s vital that contractors play close attention to labor costs as each project will have a fluctuating labor rate depending on the specifics of the project. There is no one-size fits all method, and each job must be handled with care. Furthermore there are many ways to go about labor costing in construction. With that said, the important thing is that its tracked, reviewed, evaluated, and incorporated into your decision making. While the best way to calculate and track labor costs is via construction management software, below we will look at a few common methods used in the construction industry to calculate labor costs.

Labor costing methods #

Unit Pricing #

Using the unit pricing method, contractors start by breaking down total labor costs into individual “units” such as hours, days, or weeks. Specific units of work are then assigned a fixed cost per unit of labor, such as price per hour or price per square foot. In practice, this will result in a base rate for labor that will reflect the cost per hour for all workers to complete a task; for example, what is the cost per hour to build a 200-foot fence; what is the cost for your team to pour a cubic foot of concrete?

Using unit pricing a contractor will calculate labor costs by multiplying the hourly rate, or unit price, by the amount of time that it takes to complete one unit of work. For example, if a project task involves refinishing a kitchen floor at an hourly rate of $35 per laborer, and it’s estimated that it will take one worker 5 hours to complete the task, the contractor can assume it will cost approximately $175 to refinish the floor. From here, material costs can be factored in to arrive at a total cost. Although an imperfect method, it can be great for estimating the cost of repetitive tasks in which you can reasonably estimate the time it will take to complete, such as pouring a specific amount of concrete or painting a wall.

Square foot #

The square foot method, as the name suggests, is a method of estimating costs based on the square footage of the area to be worked. This is calculated by multiplying the total square footage of the project by the labor rate per square foot. This involves estimating the cost of labor and materials needed to complete the job within a certain area and then multiplying that cost by the total square footage of the entire project. This method is preferred by contractors who want to use historical data to quickly arrive at a rough estimate during the early stages of project planning. 

For example, a project requires the painting of a wall that is 12 feet x 12 feet, or 144 total square feet. From here, let’s assume the following factors have been estimated for the job: 

  • One worker will be required 
  • This worker has an hourly labor rate of $30/hour (including labor burden)
  • Material costs will amount to $30
  • It will take 5 hours total for this worker to complete the task 

Next lets calculate total labor cost to paint the wall by multiplying labor hours by hourly labor rate: 

5 labor hours x $30/hour = $150 labor cost

To calculate total costs for the project we will add the total material and labor costs together:

$30 material costs + $150 labor cost = $180 total material & labor cost 

To arrive at a cost per square foot all that is needed is to divide the total costs by the total area:

$180 / 144 total square feet = $1.25/sq ft – in other words, it will cost the contractor $1.25/ sq ft to paint a 144 sq ft wall in five hours using one worker. Why is this information useful? Because now, there is a framework, and historical data set, for estimating the labor costs for this type of project or any similar jobs in the future. This framework can then be used to craft more accurate bids. In addition, in the event that it takes this worker longer than five hours to paint the wall, you can use this framework to determine exactly how much the additional time is costing you so you can adjust costs on other areas of the project.

Rule of two #

The rule of two aims to calculate the cost of labor and materials by estimating the total project cost and then dividing it by two, to arrive at a rough estimate for the cost of labor. 

This method doesn’t take into account actual costs and instead relies on experienced-based estimates of how long a contractor thinks a project should take; running on the assumption that labor typically amounts to 50% of total project costs. Once labor cost has been estimated that figure is multiplied by two (hence the name rule of two) and you theoretically arrive at a basic cost estimation for the project. 

(Estimate Total Hours to Complete x Hourly Rate) x 2 = Labor Cost 

For example, if a contractor has 5 workers working 8 hours each at an hourly rate of $20, the labor cost would be calculated as follows: 

(5 x 8 x $20) x 2 = $1,600 in labor cost

From here an additional 10-15% is added to account for incidental expenses bringing total labor costs to: $1,840 

While the rule of two is undoubtedly a quick way to arrive at a rough estimate, it should not be solely relied on; it fails to account for the many nuances of project costs, doesn’t reflect real or historical project costs, and doesn’t accurately account for cash flow needs, should costs inevitably change throughout the course of a project.

How to calculate labor cost #

Establishing base rate #

Establishing a base rate comes down to breaking down basic labor costs per hour. This will mostly result in deconstructing wages per hour or per role. 

For example, this can be broken down into: 

  • What role did the task or job?
  • What is their wage?
  • How many hours do they work per week?

Answering these questions will consolidate the following information, which can then be used to establish a base rate:

  • Foreman: $50/hour
  • General laborer: $35/hour
  • Apprentice: $20/hour

Taking into account each role and their wage per hour, the base rate for this example is $105 per hour. Determining a base rate is a great starting point, but contractors will need to take it further: it’s vital to account for “all-in” labor costs by applying the appropriate labor burden.

Determining labor burden #

Accounting for labor burden is perhaps the most important step in determining accurate labor costing in construction. If contractors don’t have an accurate picture of the overall labor burden, profit on each job will appear larger than it actually is; in some cases failing to incorporate labor burden can skew job costing numbers by as much as 50%. Luckily, accounting for labor burden is just a matter of knowing where to look to access the appropriate information. 

Burden costs include but are not limited to: 

  • FICA 
  • State unemployment tax
  • Health/Dental/Vision or other benefits
  • Retirement contribution
  • Workers’ comp

Acquiring all of this information should be done by referencing payroll reports. These reports are great for this as they will include not only hourly wages but taxes, unemployment insurance, and other fees that you are likely paying to your payroll provider. Other vital documents to reference include workers comp and health insurance plans. For a more in-depth breakdown of labor burden and how it fits into the bigger picture of overall job costing, reference our essential guide to construction job costing.

Finding the labor rate #

Calculating labor rate will include summing up all hourly rates from every worker followed by multiplying that number by labor burden and markup percentage. 

How to calculate: Sum of all hourly rates x Labor burden + Mark up percentage = Labor rate

Finding accurate construction labor cost #

Calculating accurate labor costs will now come down to incorporating all of the above information. Take the total hours worked and multiply this number by the hourly rate (including labor burden) for each worker. 

For example, if a laborer is paid $35/hour with a labor burden at 30% of wages, their labor rate will equal: $45.5/hour 

($35 + ($35 x 0.30)) = $45.5 labor rate

If this employee spends 8 hours completing a task, their labor cost will equal $364 for the task ($45.5 x 8). Extrapolate this process for each worker on each task, and an accurate labor cost can be determined for the entire job. 

Tracking, calculating, and organizing labor costs by hand is nearly impossible. Using construction management software is essential for accurately tracking labor costs. With Knowify, contractors can add their entire crew’s wages and labor burden, so that every time a worker checks in and out, their total labor cost is accounted for. With our easy-to-use suite of tools contractors can capture the full cost of every employee working on a job site. In other words, you’ll never have to manually crunch labor cost numbers again. 

Example of labor costing in construction #

A contractor assigns a foreman and two tradesman for 5 days to complete a job. They are able to get it done without any overtime. The contractor ends up paying the foreman $25/hr for the 40 hours, and each tradesman $20/hr. Altogether, the direct wage costs for the job are $2,600.

However, there are other costs that should be considered as well. The contractor also pays for health insurance and worker’s comp insurance, which she/he has calculated to cost around $6/hr on a combined basis. She/he also has to pay for the portion of FICA taxes. Altogether, the true, fully-burdened labor cost of the job ends up being closer to $3,500.

Labor costing in Knowify #

Knowify can help you properly burden your labor, and then will track your actual labor costs in real time as your employees clock in/clock out using the Knowify mobile app. (Alternatively, if you do not want employees to use the app, you can enter timecards in the office.) Knowify also provides overtime tracking tools for those who need them.

Setting up fully-burdened labor rates will help in your labor costing process. You can do so during the setup process or later on in the admin section.

For overtime, Knowify will allow you to set up rules for both daily and weekly overtime. As employees clock in and clock out, those rules will be applied and Knowify will identify overtime candidates. It will be up to the user reviewing time to split entries into overtime or double time upon approval.