Labor rates are an integral part of any estimate; they are also one of the toughest parts of any construction estimate. That is because there are several components that determine the total labor costs of a project and because gut feel and experience are two critical intangible elements of good construction labor estimating.
Knowing how to calculate accurate labor costs is critical when looking at whether a project will be profitable or not. Wages, benefits and health insurance, employment taxes, as well overheads like rent, office supplies, cell phones, and company vehicle mileage should all be factored in.
Training costs can also be factored into this equation, as you should consider the loss of productivity because of training. Every hour your crews are not working or not meeting productivity targets is lost income, even when their productivity is down because they’re training new team members on the job.
To identify the labor costs per employee, combine all the costs of the items outlined above and divide them by the number of employees. Once completed, divide this cost by the number of hours worked per year (on average, 2000 hours),which includes two weeks of paid vacation. The number left is your true labor cost.
If you have different classes of employees, like foremen, skilled tradespeople, and unskilled laborers, you might need to calculate these rates for each type of employee and combine them to calculate your crew rates based on the actual employees on each crew.
Now you have your true labor cost calculated, you can use this when calculating construction estimates, whether you do it by hand with a pencil and calculator or use a more sophisticated tool like kitchen estimating software or bathroom estimating software. Even the most innovative and sophisticated construction estimating system still requires accurate labor rate pricing from you to work properly.
While calculating hourly labor rates is usually fairly straightforward once you have all the costs figured out, calculating the time required to complete the job comes from experience.
Only a highly skilled construction estimator will be able to not only calculate baseline completion times for a given project but also factor in all the potential risks that could extend the overall project time.
First, the most important factor to consider is the scope of work.
Understanding the full scope of work will help you assign not only the correct number of workers but also the required time. It’s recommended when assigning time to a scope of work, use ½ days or full days rather than trying to be particular with hours, as this will give you some breathing room in the event of an unexpected issue.
Second, consideringthe ability and experience of your employees against the scope of work is critical, as this will also play a key factor in the length of time it will take to complete the job.
For example, a younger laborer might be able to complete a job quicker, but the experienced one will likely complete it to a higher standard the first time around, so less time will be requiredfortouch-ups and fixes down the line. A good leader should understand the abilities of each member of their workforce so that the correct hours are allocated.
It’s human nature to want to succeed, and by providing the adequate time to complete the job you will find that you will see a higher quality of work as the employee feels like they have been given the opportunity to be successful. Having allies in the construction industry is a recipe for success. If you want to build a team of trades around you, allowing them a chance to be successful each time will only work in your favor.
Once you have identified the total hours it will take to complete the job, divide this up between the employees you have and multiply it by their rates. This will calculate the total cost to complete this project. Don’t forget to also include any specialized tools and equipment each crew will need to complete the work as planned.
Finally, to finish calculating the total labor costs, apply a margin to this cost. Depending on the size of the job, most residential markups should be in the 30% to 50% range.
In manufacturing and other industries, one of the key tools production planners and estimators use to calculate labor costs is what is known as a “time and motion study.” This involves watching while tasks are completed, timing them, and then calculating the average time to complete one task.
That’s a little different in the construction world, where a construction crew’s daily tasks vary widely, and where things might change on very short notice. However, while it’s harder to measure productivity upfront in the construction world, you can use job costing data to verify and improve your productivity estimates.
Ensure that you keep track of all the time spent on every job, and how many people were on site, which tools and equipment were used, and so on.
At the end of the project, review the total number of hours it took to complete the job and compare it to your initial estimates. Adjust your assumptions as necessary, anduse this knowledge in future jobs.
At the end of each construction project you complete, you should always compare your estimated costs with your actuals so that you know where you are making money and where you need to make changes. This also helps to identify potential productivity issues in the field so that you can address them as needed.
Using budget codes like CSI codes is a very good idea when conducting construction project costing, as it will help you drill down to exactly what components of the job and thus paint a clearer picture; try to remember that as you go through this process, there will be situations where the actual labor requirement for a project is vastly different to what you assumed it would be.
It's only a mistake if you don’t learn from it.
There’s no substitute for trial and error when it comes to estimating construction labor, and even if you’ve been in the industry for years or decades, sometimes the best you can do is an estimated guess, followed up by tracking, costing, and adjustments.
However, whether you’re tracking general construction and home building or you need specialized kitchen estimating software or bathroom estimating software, choosing the right construction estimating software can make all the difference.
Innovative, high-tech construction estimating software like CostCertified allows you to create and update unit rate pricing, including detailed labor calculations, as often as you need to, to get them perfectly dialed in. Then, once they are, CostCertified makes it quicker and easier to generate complex, in-depth estimates based on the most accurate labor rates possible without reinventing the wheel each time.
If you’d like to learn more about how CostCertified can help you to build better estimating systems, be more accurate in your estimating and quotes, and make more profit on every job, contact our team. We’d love to give you a free demo of our platform and everything it can do for your team.