How to Calculate Labor Cost in Construction

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Knowing your numbers is crucial to the financial success of your business and calculating in your labor costs to every project is just one piece of estimating a project. It is a very important piece nonetheless. In this article, we are going to discuss labor costs, what you need to think about when it comes to calculating your labor costs, and how to factor these costs into your estimating.

There are some differences that we will discuss in terms of hourly wage earners and salary employees in your business, the hidden costs of having an employee, the labor efficiency and burden that you should calculate into your pricing, and how all of this can be billed into every project.

If these costs are not accounted for, they will be coming directly out of your business’ pocket which means it will directly impact the profitability of your business. A business that is not profitable is not a business that will last long, especially in the construction industry. Though our website is quite specifically dedicated to landscape construction business owners, this information can be applied across a variety of businesses that estimate and bid on projects.



Construction Labor Cost

There are some important things to consider when factoring your construction labor cost into any project that you estimate. Throughout the next few sections we are going to discuss these factors and how they affect the labor cost for each project that you estimate.

If you are interested, at the end of this article we have a spreadsheet available which will help act as a construction labor cost calculator and provide your construction labor cost percentage based on each project that you estimate. This also includes factoring in your overhead expenses that was discussed in a previous article, your material costs, and your profit.

Hourly vs. Salary Employees

You first need to separate your employees between the hourly wage earners and the salary employees. Those employees that earn salaries will be factored into every project much like an overhead expense would. This formula would involve calculating the number of hours available to work per season and dividing that into the employees salary to provide the amount per hour that you should be budgeting into each working hour on a project.


Salary Expense per Hour = Salary / Yearly Budgeted Hours

Now, this number should be divided by each operating crew that you have in a specific division. For example, if you have two projects on the go at any given moment and have two crews operating, you will want to divide this number by two for every estimate that is sent out. This is because you do not want to be gaining back 200% of the salary, just 100% of the salary. In a two crew scenario, each crew would recover 50% of that salary. It would be nice to recover 200% of that salary, but you would likely be overbidding projects and not landing as many as you would like.

Hourly wage earners are much easier to factor into each project as their hourly cost is calculated into the project based on the amount of hours are being budgeted for that project. There is a little more to this that just calculating the wage that each of these workers earn, for both salary and hourly wage workers.

Overtime

Overtime is calculated as a budgeted amount and included as an overhead expense that gets billed in to every project. This is because overtime is not always predictable, especially in the estimating process for a project. It is easier for you to budget a certain amount based on the amount of hours that you are budgeting for your workers and how much they are paid for overtime.

At the beginning of your working year, you should calculate the total number of hours that you are budgeting for your working season.


Total Number Hours Budgeted = Working Weeks in Season x Working Days per Week x Working Hours per Day

With this number, you can then calculate the amount of hours that are paid overtime by calculating the amount of hours per season that a worker can work without overtime.


Total Workable Hours Without Overtime = Working Weeks in Season x Working Days per Week x Working Hours per Day Before Overtime is Paid

You can then take these numbers and subtract them to provide the total amount of hours that are overtime payable to your employees. You can use this number to multiply it by their wage and then multiply it by their overtime rate minus 1. For example, an employee that works 100 overtime hours per season and earns a wage of $15 per hour with an overtime rate of 1.5 times (time and a half) would be calculated as: 100 x 15 x 0.5. This would only be for that specific employee and this would need to be calculated for every employee that would earn overtime pay.

An alternative method to this would be to look at last year’s budgeted overtime and deciding whether or not you would want to increase that by a certain percentage based on employee’s wages increasing and the amount of overtime hours that would change.

Vacation Pay, Bonuses, Benefits, Payroll Taxes, and Insurance

For employees with salaries, you should calculate these costs as a yearly amount and include it as an overhead expense much like their salary would. This overhead expense would then be included into every project that is estimated.

For employees that earn an hourly wage, you could calculate these as an hourly amount and add them into their hourly wage that would then be calculated into every project depending on the amount of hours that the project is estimated for. Alternatively, if you do not have these as an hourly amount you can incorporate them as an overhead expense much like you would do for a salaried employee.

Labor Efficiency

Labor efficiency is an important calculation to make when budgeting the amount of hours that a project will take which in turn affects the amount of labor costs for both wage earners and salaried employees, as well as the overhead expenses, that are built in to the estimate. That is why this is such a crucial calculation to include.

We calculate labor efficiency as a percentage that would cause the total amount of hours budgeted for a project to increase by. We factor in two things:

  1. Driving Distance

  2. This number will change from project to project and depend if your crew arrives on a job site or comes to your shop first and then drives to the job site. When does your employee start and stop on the clock? Is it when they arrive at your shop and end when they arrive at your shop? If so, this driving distance needs to be incorporated into the working day. If they clock in and out when they arrive on the job site, you do not need to worry so much about this portion. These trips should be added up and included as an hourly amount.

  3. Lunch and Breaks

  4. During lunches and breaks, your employees are not working which means it should be factored into the efficiency of their work. These lunches and breaks should be added up and included as an hourly amount.

Your efficiency factor is based on the amount of hours you have budgeted for each working day. You should divide the amount of hours that the above to factors provided by the number of hours budgeted in the working day and multiply that by 100 to provide a percentage. You would then subtract that from 100 to provide you with a percentage that would be multiplied by the labor time you had budgeted for the project.

For example, if it took your crew 0.5 to get to the job site after they were clocked in and the same amount of time back to the yard at the end of the day and took 1 hour of breaks and lunches throughout the day and their working day was 8 hours, the formula would look like this:


2 Hours of Lost Time / 8 Hour Work day x 100 = Efficiency Percentage

Labor Burden

With your total labor time based on the amount budgeted for the project and factoring in the efficiency of your crew, you can then calculate the amount that your labor costs by simply multiplying this time by the wages of the employees that will be assigned to the project and the salaries of everyone on staff. With this number, you can then factor in the Labor Burden.

Labor burden in the field of construction is an invisible cost associated with labor. There are many costs that we have discussed previously in this post that we have factored in as an overhead expense or have added it to the employee’s hourly wage. However, labor burden takes into factor the more hidden costs associated with your employees.

These factors primarily include the cost of training new employees which would be associated with the lost of efficiency for the person training and the learning curve associated with training a new employee until the reach optimal efficiency. Not to mention that not every employee will be as efficient as the next.

This is a difficult factor to calculate, but necessary to include in your labor rates. This can also include any markup amount that you would want to include on your labor.

Calculating Your Labor Rate

These are the factors that you need to consider when thinking how to calculate labor cost in construction. Your business may have other specifics that you will want to factor into your labor costs, but this article has covered a lot that should be included in every estimate that is sent out.

Production rates are the best way to calculate how much time it will take you to complete a project. It involves some work and time to evaluate and average out your production rates in order to take them into consideration when estimating a project, but once you have this data and can continue to refine it you are able to streamline your estimation process and even hand over this process to somebody else rather than spending your time on it. This allows you to get one step closer to working on your business rather than working in your business.

Production rates in construction can be broken down into the various stages of the project in order to average the amount of time it takes to complete each step of the process in a project. Each of these processes can then be added to a project and you can insert the amount of area that is being installed or completed to provide how much time it will take you to complete that step and ultimately that project.

You should be keeping track of your own production rates in the field by each step of the process that you want to factor in to your estimate. For example, as a hardscaper we record our excavation, base preparation, bedding layer preparation, laying pavers, and installing polymeric sand. However, each of these can be further broken down into various categories. For example, our excavation can be broken down by depth, front yard or back yard, the machine we are using, and so on. It is important to take notes on the size of area and any other necessary information when recording your production rates in the field to be able to bring back to the office and categorize them correctly.

An example of a production rate would be taking the excavation of a front walkway by hand dig and wheelbarrow to dispose of. If we recorded ten of front walkways completed, all of them had an average square foot amount of 200, and the average amount of time it took us to complete that was 6 hours, we could then input that production rate as 200 square feet = 6 hours. That way when we are estimating a 400 square foot front walkway excavation, we can simply input the square footage for the excavation and calculate that it will take us 12 hours to complete using the same method.

This is how production rates work when you are calculating an estimate. Other things that would need to be factored as your business grows is how many people are on those crews that you are recording the production rates of.

 

The easiest way to be able to calculate all of these costs is by using our Budget and Estimate Spreadsheet. This helps you calculate your labor costs, overhead expenses, cost of sale, profit, and budget these into every project that you estimate in order to ensure that every project you are estimating is covering your business’ expenses.




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