Let’s face it: construction is a labor-intensive business. While there are admittedly more automated tasks than ever, on the job site there is no substitute for physically bolting parts together. Excavating equipment doesn’t run itself, either. Experts estimate that labor is about half of the total price of construction.
For this reason, it is important to accurately estimate your labor costs when bidding on jobs. Fail to do this, and you risk poor job outcomes. These can include customer anger when you must ask them for an adjustment, lack of profitability, or having to hire cheaper laborers. None of these are good for your business. So, how do we ensure accuracy? There are three methods to crunching the numbers.
Methods to Estimate Construction Labor Cost
1. Use Hourly Units
Estimating based on hourly units is probably the most common method for smaller projects. This method is also used in other skilled trades such as auto mechanics. One of the reasons that this is popular is the ease with which you can make the calculations.
However, this is easier to do with small projects. Fixing a leaky faucet takes about the same amount of time for each job. On the other hand, entire structures are more complicated. In this case, you’ll break the structure down into individual tasks, such as pouring the foundation or framing. From there, it is easier to estimate hours required for each task. Once you have determined the total number of hours, you can start making the estimate.
Calculate total hourly cash wage for each crew member
While it is sometimes possible to complete smaller tasks with one person, most construction projects employ a crew. To keep the numbers relatively simple, you should add up the hourly rate for each crewmember you intend to assign for the job. For these purposes, let’s say you’re using an apprentice ($15), a journeyman ($25), and a lead ($40). Your total cost will be $80 per hour. This is the amount you will pay in salary to have your crew on the jobsite.
Determine “labor burden” or overhead
Of course, cash wages aren’t the only costs associated with each employee. Rather, you have to pay mandatory employer expenses such as payroll taxes and worker’s compensation, adding to the expense. For many construction employers, there will be benefits such as health and disability insurance, paid time off, and uniforms. Lastly, consider the supplies and personal protective equipment that are tied to your employee.
Experts call this overhead the “labor burden” or employee overhead. If you don’t consider this amount in your estimate, then the labor costs will come in too low. Your goal is to calculate labor burden as a dollar amount per hour, per employee. Then, add it to the cash wages above.
Don’t Forget Productivity
Remember, workers don’t typically work full speed ahead for 8 hours a day. There are mandatory breaks throughout, and the inevitable pause to catch their breath. Nobody can physically exert themselves to the maximum extent possible on a consistent basis. This means that you should be realistic about how much a worker can accomplish every day under normal conditions.
Another productivity factor to consider is contingencies. For instance, sometimes a supplier will deliver something late, leading to downtime. Your workers can’t call it quits for the day, so you will have to keep them on the clock. Other contingencies to consider should include bad weather and employee sick time, both of which can increase working time. Make sure you know how each of these will affect your labor costs.
Know the Number of Hours Needed
By now, you have determined the total labor costs for each hour of working time. From here, you should use a mixture of experience and industry wisdom to determine the total number of hours for your project. This is easiest to do if you have accurately estimated the number of hours it will take for your crew to complete each task.
Add Markup
Finally, add your markup rate. For most general contractors, this will be 10% of the total estimated cost. Subcontractors tend to charge more, around 20%. However, regional differences and market conditions can change this number. Be sure that an ideal profit margin is part of your business plan. It’s best to add markup for all segments of your estimate to ensure profitability.
2. Estimate Based on Square Footage
Estimating your labor cost based on square footage is a relatively easy method for large projects using predictable techniques. It can be less accurate, however, for more complex projects. This reduced accuracy is due to the greater potential for variations.
Averages for Commercial and Residential, Nationwide.
On a nationwide scale, the cost of labor per square foot will be about half the total construction cost. As a good starting point, then, take the total cost (without markup) and divide in half. For residential construction, the labor costs average $150 per square foot, and $170 for commercial. However, if you require more specialist labor, such as a stone mason, then the costs can be higher. To adjust, compare the hourly rate of this worker to what’s typical for your team. Then, add the difference for the number of square feet he will work on.
Take Regional Differences Into Account
Another difference you should consider is regional labor costs. If you want to build a house in San Francisco, it will cost much more than the same home in rural Ohio. This is especially true for labor, because you have to pay extra in cash compensation and labor burden. Differences will be somewhat less for materials, but you’re still paying more to the supplier for their employees.
Another way regional differences can make labor costs higher or lower is weather conditions. If your area has a lot of rain or heavy snow, then you’re likely to get more downtime. Likewise, extremely high or low temperatures can contribute to a day off or reduced productivity. Be sure to know how local conditions affect labor costs per square foot.
Consider Higher Complexity
Not every square foot is created equal. Some rooms, like bathrooms or kitchens, will automatically cost more per square foot. This is partially due to extra plumbing requirements, but other costs also factor in. For instance, you may have to pay for a tiling specialist for the floor. Likewise, a commercial building might need extra rebar or bulletproof glass. If a building has higher square footage than average in the high complexity category, then you need to adjust the numbers.
Include Markup
Finally, always add the markup at a rate you have set for your business. Customers sometimes review estimates carefully, so adding markup at every step helps protect your profits. Plus, this makes it easier to add markup when there are changes during the project.
3. Use Software
Both the unit price calculation method and the square footage method were designed before the computer age. However, not everything has to be done manually. As your business grows, using specialty construction software will help improve project management and estimation accuracy. Here’s how to use software to help estimate.
Include Historical Data
One way to enhance estimating by computer is by using historical data. The most important thing historical data gives you is the number of hours needed to do each task. Then, you can use the unit method to easily calculate labor costs with the best data available. Depending on the software used, this historical data might come as an integration from your project management program. Alternately, you can use the project management program itself to do the estimating if it has that capability.
Takes All Labor Costs into Account
Calculating labor costs is easier with software because you can look up the exact cost per hour for each employee. Alternatively, look at the precise amount you paid out for labor in a similar job. Project management software helps calculate the support staff time, too. Account for differences, and the estimate will be highly accurate.
Ensure Data Points are Accurate
The magic of estimating software is that it does things automatically based on datapoints. However, if you use the wrong data then you won’t get an accurate result. Not only does this mean that you need to input data, but you need to adjust as needed. Did labor prices per hour increase? Has the labor burden changed due to benefit prices or taxation? Make sure these changes are reflected. Otherwise, your labor costs can come in substantially higher than initially planned.
Integrate with Project Management Program
Unless you are using an integrated software suite, it’s important to integrate data. Most companies allow for automatic data sharing between programs, but if not then you need to do this manually. Finally, consider integrating project management and invoicing. This way, sending out bills will be much easier than if you need to use the manual method. Best of all, you’ll have all the data at your fingertips if the client has questions.
Estimating is one of the hardest parts about construction. There are so many datapoints and variables that it is easy to mess up. Worse, errors cost your business in profitability, goodwill, or both. Fortunately, by employing these methods properly you can make the bidding process as painless as possible.
