How To Calculate Labor Cost In Construction - The Only Guide You Need

Did you know that labor costs account for up to 40% of the construction project budget? That’s right! These expenses eat up a significant portion of any project’s funding, and that’s why tracking and calculating them is crucial. Otherwise, you risk project overrun due to miscalculations. 

Many companies, especially small and medium-sized ones, use an estimation approach to deal with construction labor costs, which carries many risks. First, the company risks losing profits due to unforeseen labor costs like overtime. The second risk is project delays as a result of understaffing, where the company realizes this mistake mid-project. Finally, a company risks damaging its reputation by handling employees unprofessionally and delaying the project.

This guide looks at how to calculate labor costs for a project to ensure profits and avoid delayed projects and damaged reputations. We will also break down the labor costs to ensure you understand them to avoid overestimating or ignoring the costs. Finally, we will explain the benefits of calculating these costs to your company to set you on the right path.

Let’s start by understanding labor costs and their different types in a construction project. 

What are Construction Labor Costs?

Labor costs are direct expenses for hiring, training, and compensating construction workers during the construction period. It’s an hourly based wage that the company must track at all times, otherwise, it will incur financial losses.  

Did you know that labor costs take different forms? Let’s look at the common labor costs that construction companies are likely to face. 

Different Types of Construction Labor Costs

Construction companies incur different labor costs depending on the project’s size and complexity. Let’s start by looking at the common labor costs.

Standard Construction Costs Across Different Projects

These costs are constant in all construction projects. They include:

Direct Wages and Salaries

They are usually hourly wages and are major cost components in every construction project. The hourly wage depends on many things, including experience, as more experienced laborers command a higher fee. Unionization is another influencer, with different labor unions advocating for different wages for their members. Finally, the project’s location is another determinant, as different states have different minimum wages for construction workers. 

The national average wage for constructors in the US is $15.31 per hour, translating to $31,842 per year. According to Zippia, New York is the best-paying state, paying $47,620. Alabama is the lowest-paying state, with a rate of $26,195. 

Benefits

Although benefits were not universal in the construction industry, they’re becoming very common. They include paid time off, retirement plans, and medical insurance. Benefits are incentives to keep employees motivated, given the laboring nature of the construction projects. 

When it comes to retirement funds, construction companies prefer the 401(K) scheme and would contribute anywhere from 3% to 5% of the employee’s contribution. However, although less common, some companies contribute a dollar for a dollar to a certain amount. This way, an employer shows their generosity and the value they place on their employees. 

Payroll Taxes

These are mandatory deductions from employees’ paychecks, which the employer has to match. The money funds various government social welfare projects for the financial well-being of citizens. 

Let’s look at some examples. 

• Social Security - It’s a scheme aimed at providing people with monthly income after retirement. The scheme has a minimum taxable earnings of $160,200 and a 12.4% rate contribution. The employer contributes half of it, which is 6.2%. 
• Medicare - The program provides medical care for seniors aged 65 and above. The current rate is $2.9%, with the employer requested to contribute 1.45%. 
• Federal Unemployment Tax (FUTA) - The tax deduction helps fund people who lose their jobs due to unforeseen circumstances. FUTA is solely paid by the employer with a rate of 0.6% on the first $7,000 of an employee’s wages. 
• State Unemployment Tax (SUTA) - The program’s aim is similar to FUTA, but the rates vary with states. SUTA has three categories, including new employers who pay 4.1%, positive-balance employers who pay from 1.5% to 4.1% based on experience and rating, and negative-balance employers who pay between 5.2% and 8.9%.

Disability Insurance 

The program helps people who become disabled in their line of work and cannot work anymore by providing monthly income. The insurance rate is 1.45%, with the employer and employee required to pay half, which is 0.725%. 

Recruitment and Training Costs

Construction companies incur recruitment expenses when they decide to onboard new workers. Some recruitment costs include job advertising, agency fees, drug testing, and background checks. 

These companies still need to train new recruits to work efficiently on any construction projects. The training could include OSHA guidelines, operating different machines, and general construction skills. The rates here depend on the company’s budget, the number of recruits, and the size of the project. 

Let’s look at additional construction labor costs that are not often common in many construction projects. 

Overhead Expenses

These are additional expenses in a construction project that are not directly related to the project but are still important. They include office workers and software. Overhead costs depend on the nature of the project and its size. 

Permits and Licenses

Some projects require specific licenses for employees due to the materials used and the location. For instance, a construction company might be required to obtain a license for handling hazardous materials when working on a project where employees are exposed to corrosive or dangerous materials like chemicals. 

Subcontracting

A construction company needs to factor in the cost of subcontracting parts of the project to a third party. Subcontractors could include plumbers, electricians, and painters. The rate depends on the contractual agreement between the contractor and subcontractor(s). 

Now that we have covered common and additional construction labor costs, let’s see how you can calculate them. 

Calculating Construction Labor Costs

As we have seen, construction labor costs take many forms, and it’s easy to leave out some when budgeting for your next project. Calculating construction labor costs is a complex process as it involves a lot of details, many of which are unknown to new contractors. 

There are two ways you can calculate labor cost. You can use the traditional approach of listing all the costs and using a calculator to crunch the numbers, or you can use a cloud-based program to help out. 

All these methods are effective in estimating labor costs. Let’s analyze them. We will start with the old-fashioned methods.

Traditional Construction Labor Costs Calculation Approach

In this approach, you are required to do all the ‘dirty work’ of identifying the costs and accounting for them. Although the approach has been used for decades, it faces many challenges. You must know all the labor costs, direct and indirect, and be informed of the new wage rates in your region and for specific skilled labor. 

Nonetheless, let’s cover the approach for those who relish a little challenge in their line of work. In this case, we will look at two traditional approaches - the manpower estimation method and the unit quantity and productivity method.

For any type of construction project, it’s best to start by breaking down the entire project into smaller tasks. 

This way, you’ll know the number of workers you need to complete the tasks and the average labor cost in construction. But first, let’s start by looking at the basic labor costs to expect in any construction project. 

Manpower Estimation Method

The manpower estimation approach involves identifying the required labor hours to complete a specific construction project and the number of workers for that project. It also includes the hourly wages for these workers. 

You must first get the total cost of completing the project by one worker. Start by multiplying the hourly wages by the total labor hours the project requires. Next, you multiply the total cost of all employees needed to complete the work. For this, you need to multiply the figure of the total cost of completing the project by the number of employees needed. What you get is a labor cost estimate.

Here is a simple formula for this calculation:

Total labor hours required to complete the project X Hourly Wages X Number of Workers = Total Labor Cost.

Let’s look at an example.

Suppose you have a small construction project with the following details:

Total labor hours = 120 hours

Hourly wages = $30

Number of workers = 10 workers

Using the formula, we can calculate the total construction labor cost as follows:

120 x 30 x 10 = $36,000

It would cost the contractor $36,000 in total labor expenses to complete the project.

However, the manpower estimation method is just a framework and is unreliable in accounting for accurate total labor costs. 

For instance, it makes the wrong assumption that workers receive standard rates. For example, a foreman or a supervisor earns significantly more than unskilled workers. Furthermore, the method doesn’t include crucial details like benefits, Medicare, FUTA, SUTA, and Liability Insurance. All these details are crucial in establishing total labor costs.

If we want to get an accurate figure, we must include direct and indirect costs. Doing so helps us arrive at a more appropriate figure and adds credibility to the approach.

First, we need to examine the base labor rates and add the labor burden for each worker to understand how each affects the total labor cost.

Calculating Base Labor Rates

Base labor rates are hourly wages that a construction company pays its workers. These rates are fixed by the contractor or project owner and vary depending on the location, the type of work, experience, and specialty. 

Here is an example of base labor rate calculation:

Foreman: $45/hour

Concrete Pourer: $25/hour

Framer: $30/hour

Using these figures, we can then calculate the base construction labor cost for three workers as follows:

45 + 25 + 30 = $95 per hour. 

Let’s assume the project requires a 40-hour commitment per week.

$95 x 40 = $3,800 per week.

However, this number is only the base labor cost and doesn’t include overheads and indirect costs. Even so, it’s a great way to start your construction labor cost calculations. It gives you a clear idea of the hourly wage you should pay each of your employees.

Calculate the Labor Burden

As we saw earlier, labor costs are multi-faceted and include many indirect costs that contractors can easily miss. Accounting for every labor cost in construction is challenging, especially for someone without proper experience or time to go over all the details.

Labor burden includes items like payroll taxes which include:

Social Security - Where a contractor contributes 6.2%.

Medicare - With a standard contribution of 1.45%

FUTA - A base contribution of 0.6%

SUTA - Contribution depends on the company. In this case, we will assume it’s a new construction company required to contribute 4.1%.

Disability Insurance - 0.725%

Using this information, let’s try and adjust the base labor rates to get the labor burden for each employee.

Foreman: $45 (6.2% SS + 1.45% Medicare + 0.6% FUTA + 4.1% SUTA + 0.725 DI) =$5.88/h

Concrete Pourer: $25 (6.2% SS + 1.45% Medicare + 0.6% FUTA + 4.1% SUTA + 0.725 DI) =$3.25/h

Framer: $30 (6.2% SS + 1.45% Medicare + 0.6% FUTA + 4.1% SUTA + 0.725 DI) = $3.92/h

Let’s add the labor burden cost to the base labor cost to get the estimated total construction labor cost for this project. 

Foreman: $45 + $5.88 = $50.88 per hour

Concrete Pourer: $25 + $3.25 = $28.25 per hour

Framer: $30 + $3.92 = $33.92 per hour

Let’s adjust our previous calculation by including the new figures. 

Total Labor Cost = $50.88 + $28.25 + $33.92

Total Labor Cost = $113.05

Using the previous weekly labor hours requirement, i.e., 40 hours, our total weekly labor wages are:

$113.05 x 40 = $4,522

You can see the difference in the two figures, with one accounting for base labor costs only, while the other includes labor burden. 

Even so, that’s not a complete figure. You must include employee benefits like paid time off, retirement plans (401K), health insurance, workers' compensation, overtime, and life insurance. These figures vary depending on companies, contract agreements, and your relationship with your workers. 

There’s also the issue of administrative overheads, like office workers, job advertising expenses to get new employees, and training costs to get them ready for work. Again, these costs vary depending on your location, the number of employees you need, and the type of training they require. 

You must also account for time theft, which is very common in construction projects. It’s a situation where you pay employees for the hours they didn’t work. Time theft is responsible for up to 3% of budget losses in many construction projects, translating to billions of dollars of losses annually. 

Time theft in a construction project results from any of the following:

Buddy punching - It’s when someone decides to punch in for a late or absent colleague.

Running personal errands during working hours.

Exaggerating time sheets for extra hours, they haven’t worked. 

Lastly, the approach doesnt account for overtime, where employees bill you for extra working hours. To be safe, it’s best to include a 30% markup on the construction labor cost to handle any unforeseen circumstances and remain in the profit zone. 

Let’s move on to the next construction labor cost calculation method.

Unit Quantity Productivity Method

The unit quantity productivity method relies on historical data when calculating construction labor costs. It involves dividing the project into smaller measurable units. You then estimate the labor hours required to complete each unit based on the historical data of a similar project. 

The approach follows these six crucial steps:

Identifying Work Units

The first step is identifying the work unit that needs completing. Let’s take an example of a road construction project. 

In this project, the work units include excavation to remove debris and clear the area. Another work unit is laying asphalt on a freshly prepared site. It could also be installing signage. 

As you can see, we have taken a broader project, road construction, and divided it into smaller work units that need completion independently to complete the entire project. 

Determining Quantities

Once we have defined appropriate work units, we focus on the quantities for each work unit. Using the example above, we could measure excavation in cubic meters of the soil that is removed from the site. 

For the asphalt lying project, we could use the square meter approach for the pavement. 

Referring to Productivity Rates

We then use the historical data of a similar project to determine the amount of work an employee can complete in an hour. We also rely on industry benchmarks on similar projects to come up with labor cost estimates. 

Let’s take our previous example of road construction. The industry benchmark and historical data might show that an excavator operator could work an hour to complete 15 cubic meters of excavation. 

Additionally, it could show that a paving crew could use the same time to cover 55 square meters of asphalt. 

These are the figures we use in our labor cost calculations as they seem to work on similar projects. 

Calculating Labor Hours

Now that we already know the productivity per hour of each worker, all that’s remaining is calculating the total hours our workers will take to complete the project. Let’s continue with the example above.

Suppose the excavation quantity is 750 cubic meters, with our workers having a productivity rate of 15 cubic meters per hour, then our estimated labor hours for complete excavation would be:

750 cubic meters / 15 cubic meters per hour = 50 hours. 

This means it should take our excavating team 50 hours to complete the project.

Applying Labor Costs

Since we have the labor hours to complete a project, let’s see how much it would cost us. To achieve this, we multiply the appropriate labor rates by the estimated labor hours. We refer to the historical data or industry standard rates for skilled excavator operators. 

Let’s assume the industry standard rates are $45 per hour, our labor costs for this project would be:

$45 x 50 = $2,250

The excavation project would cost $2,250 to complete. 

The figures are only for one unit, and we have to repeat for each work unit to get the estimated labor costs for the entire project. 

The unit quantity productivity method is ideal for task-specific labor cost estimations but doesn’t cover everything. You still need to factor in indirect labor costs, like labor burden, to come up with the correct figures. It's still a decent method for calculating labor cost of any project.

Additionally, you have to include a reasonable construction markup to cater for unforeseeable challenges, like delays, machines breaking down, etc, that are common in any construction project. The markup also ensures you remain in the profit zone after completing the project. 

Using Construction Management Software to Calculate Labor Costs

Construction management software, or CMS, are cloud-based programs that simplify tracking and managing construction costs. They have become integral to the construction industry, helping streamline complex procedures like tracking and accounting for labor expenses. 

The programs handle all the difficult tasks, like adding all the indirect labor expenses to the base labor costs to come up with the total labor expenses. With such functionality, you don’t have to dig through the internet for any updated rates or worry about missing key details in your labor cost calculations. 

Besides helping track and account for all the labor costs, CMS programs are also useful for connecting with subcontractors and submitting bids for construction projects. 

Use Downtobid To Send Bid Invitations To Subcontractors

Downtobid is an new tool in the construction industry, its primary focus is on optimizing the pre-construction bidding process, particularly in identifying bid packages and managing subcontractor invitations.

Simply upload your project plans, and send bid invitations to contractors in each respective trade. The tool makes sure only the most relevant and qualified subcontractors are invited, enhancing the accuracy and efficiency of the bidding process.

The AI-driven approach reduces the painstaking manual effort involved in dissecting project plans and preparing bids to save you time.

Benefits of Calculating Labor Costs

As we have seen, labor costs are complex and require a proper understanding of the construction business. Here are some benefits of tracking and calculating these expenses:

Winning Construction Bids

Every construction project gets many bids, with the project owner selecting the most affordable bid. You must include labor costs in your bid, and that’s why you need an accurate figure for such expenses. 

Profitability

Every construction company plans to make profits from their projects. Profits arise when the budget exceeds total expenses, which include labor costs. Accurate figures help you adjust your budget to leave you within the profit zones. 

Inaccurate figures mean you risk losing money or not making good profits after completing the project. 

Resource Allocation

Calculating labor costs ensures you hire the right number of workers. It also ensures these workers are assigned proper tasks, which helps with the project’s efficiency. 

Cost Control

A construction company is expected to control costs and expenses to align with the predetermined budget. Constant monitoring of labor cost in construction helps the company avoid surprises mid-project, ensuring the project is completed on time. The same way it's crucial to monitor material costs in a construction project, it's equally important to do so for labor costs.

Final Thoughts

Construction labor costs are vital to any construction company, similarly to material costs. These costs account for almost 40% of the project’s budget, and that’s why a contractor needs accurate figures to avoid surprises. Besides calculating base labor rates, you must include labor burden, benefits, and overheads when calculating total labor costs. Online programs come in handy when calculating labor costs as they automate the majority of the process.