How to Calculate Labor Cost in Construction Accurately

 December 19, 2023 by Michael Gober & Denis Gritsiyenko

Win a construction project bid and finish on time and on budget.

That’s the goal.

Inaccurately calculated labor construction costs can throw a wrench in your entire operation.

Are your labor cost estimations leaving your project open for problems before you even get started?

Thankfully there’s a fast and easy way to get accurate construction labor costs every time.

Keep reading to see why the traditional way of calculating labor costs can lead you down the wrong path and learn 3 different methods that will get your labor cost estimations closer to the actual costs than ever before.

  1. What Are Construction Labor Costs?
  2. CM Fusion: Simplifying Labor Cost Calculation With Historical Data
  3. The “Traditional Way” of Calculating Construction Labor Cost and Why It Should Be Avoided
  4. Factors To Consider When Calculating Labor Cost in Construction
  5. How to Calculate Labor Cost in Construction 3 Different Ways
  6. How CM Fusion Helps Make Calculating Construction Labor Cost Simple

What Are Construction Labor Costs?

Construction labor costs are the sum of all wages paid to employees, as well as their benefits and payroll taxes. 

Labor costs include hiring:

  • Electricians

  • Masons

  • Excavators

  • Painters

  • And other construction workers

Construction labor costs are divided into direct and indirect (overhead) costs. The direct costs include wages, while the indirect cost is associated with support labor, such as the support staff who enable the construction workers to do their duties. 

The support staff that is associated with indirect labor costs include:

  • Managers, supervisors, etc.

  • Administrative staff

  • Maintenance staff

  • Security

There are always two types of labor costs, which are:

  1. Variable costs: Any costs that are static and not expected to change such as hourly or seasonal workers. Subcontractors may also be considered variable costs.

  2. Fixed costs: Any costs that are not expected to change over time. Annual salaries are considered fixed costs.

CM Fusion: Simplifying Labor Cost Calculation With Historical Data

CM Fusion’s cloud-based construction management software keeps all of your projects organized in one place. With our software, you can simplify labor cost calculation by utilizing features like:

  • Time tracking

  • Cost reports

  • Project scheduling

  • Documentation management

These tools make for easy integration if you are using progress billing, QuickBooks, or AIA billing software.

Not to mention, the time tracking and cost tracking features can save historical data for you to reference and streamline your next labor estimate for construction. CM Fusion has made it easy for your projects to operate at peak efficiency and proficiency.

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The “Traditional Way” of Calculating Construction Labor Cost and Why It Should Be Avoided

Most contractors are guilty of calculating labor costs the traditional way. They either: 

  • Send plans to their subcontractors and hope to get back accurate pricing in time; or

  • Spend hours with a calculator in hand estimating the job themselves before sending a materials list out to subcontractors and suppliers for quotes.

The problem with calculating costs the traditional way?

It takes all of the control out of your hands and puts it into the hands of the subcontractors, which can cost time, money, and resources. 

Other cons of calculating construction labor costs the “traditional way” include:

  • Increased possibility of errors

  • Lack of decision-making based on real-time data

  • Difficulty in tracking and compliance

  • Limited scalability

  • Dependency on paper-based records 

Factors To Consider When Calculating Labor Cost in Construction

Base Rate

The base rate is the unit price established for labor. Unlike supply costs, the base rate is a constant variable. Consider this example: you have a crew of three. One employee is the lead, the second employee is the apprentice, and the third employee is the journeyman. 

The hourly rate for each employee is:

  1. Lead: $50 per hour

  2. Apprentice: $15 per hour

  3. Journeyman: $30 per hour

If you add each hourly wage together, you would have a base rate of $95. 

Labor Burden Rate

The labor burden is the additional cost of each employee such as:

  • Payroll taxes

  • Paid time off

  • Benefits

 The formula for finding the labor burden rate is:

  • (Indirect employee costs / direct employee costs) X 100 = labor burden rate

The formula for direct employee costs is:

  • Annual hours worked X hourly wage = direct labor cost 

Consider this example, you have an employee that works 2,080 hours a year for $20 an hour. With this information, we can estimate the direct employee cost before taxes is $41,600. 

Your yearly indirect employee costs for this employee are:

  • Payroll taxes: $2,000

  • Insurance: $4,000

  • Benefits: $3,000

This leaves you with an indirect employee cost of $9,000 annually for this employee. If we plug this into the labor burden rate formula we get:

  • ($9,000/ $41,600) X 100 = roughly 22%

How to Calculate Labor Cost in Construction 3 Different Ways

Labor costs can comprise up to 40-50% of total project costs. That is an extremely high number of costs to place in the hands of a calculator or subcontractor. And honestly, you probably don’t want to expose your bids to any risks that might tank them. 

Nevertheless, it’s still important to put in a realistic bid with accurately estimated construction quotes and labor costs.

Bidding is not about locking in the client with the lowest possible estimate, and then substituting in more realistic labor costs once the project has begun. 

You’ll just end up with an angry client and a bad reputation.

It’s essential to provide trustworthy and realistic labor and material estimates to clients. 

Unfortunately, with the increase in demand for materials, rising construction costs are unavoidable.

Below you’ll find three different methods for calculating construction labor costs that are so simple and accurate, you won’t need to outsource for quotes ever again. 

#1: Unit Pricing Method

The unit pricing method is commonly used in project design and bid estimates to calculate construction labor prices. The unit price or hourly rate is multiplied by the time required to complete one unit of the assembly.

For example:

If you know that the construction labor rates to build a wall are about $40 per man per hour, that’s your unit price. 

Now multiply that by the 12 man-hours required to complete the wall. 

Your direct labor is $480 per wall. 

Once you’ve used your unit price to estimate your direct labor cost, you can add material costs to get your total direct costs.

After you’ve obtained your total direct cost, you can add supervision and general conditions, overhead and profit, and any necessary markups.

If you’re unsure of a particular labor cost, you can always consult the data from the U.S. Bureau of Labor Statistics, which includes average rates across the construction workforce for various types of projects. 

Using Unit Pricing in Your Estimates

You may already have a good idea of how much labor each project will take.

If not, the easiest way to use unit pricing in your labor cost estimate is to use the data from a cost database. 

These cost databases pull pricing from construction assemblies across the country. The pricing is updated often and allows you to use the average cost as a starting point. 

You can adjust those numbers based on your zip code and field conditions and add them to your customized database.

Calculating Your Unit Pricing

If you prefer to be even more precise with pricing, you can calculate your actual unit price for labor by following these steps:

  1. Choose your sample assembly item and calculate your total labor costs using the formula Direct labor hourly rate x time required to complete assembly = total labor costs.

  2. Calculate your material costs separately.

  3. Add labor costs to material costs to get your total direct costs.

  4. Divide the total direct costs by the total square footage of your sample using the formula Labor cost / square footage = cost per square foot for labor.

  5. Add 10% for waste and productivity.

  6. Add the cost per square foot for labor to your database.

You’ll need to do these computations for each type of item until you have everything you need for your project in your database.

After you’re able to estimate the project in full, you can add the duration of the project, equipment, supervision, profit, and overhead to get your final price.

Pros and Cons of Using the Unit Pricing Method

While the unit pricing method provides a high level of accuracy and simplicity, there are some limitations you should keep in mind. 

The unit pricing method provides can:

  • Maintain a high degree of transparency and flexibility, both for the estimator and the client. This method uses cost estimating to break the project down into small, measurable, and manageable work items and tasks. 

  • Help keep track of and monitor specific conditions and requirements of the project such as labor, location, materials, overhead, equipment, and profit. The devil is in the details with this method, making it advantageous for smaller businesses and projects. 

However, this can pose challenges in some situations. Keep in mind that the unit pricing method may be disadvantageous for: 

  • Companies with large-scale projects that have huge quantities of items and variables. This can make this option time-consuming and difficult when estimating the time required to complete a task or work unit. 

  • Accurately accounting for the skill levels of certain employees. Highly skilled workers may complete tasks more quickly than their peers, which can lower cost per unit and potentially offset estimations and calculations.

#2: Square Foot Method

The square foot method is a commonly used method due to its multiple strategic benefits. It involves calculating the general cost per square foot and then multiplying the amount by the total square footage of the project. This method is typically employed in the early stages of planning and gives a broad overview of labor costs.

Below you’ll learn about the strategic benefits of the square foot method, including:

  • How to use it in your prospecting.

  • How to use it as a last-minute bidding method. 

  • How to prepare a budget estimate.

Using the Square Foot Method for Prospecting

If you're being proactive about your construction business, then you're no doubt already familiar with the concept of prospecting.

Through prospecting, you can align yourself with architects and engineers who may need budget pricing early. This method is also called the budget tool. 

This allows architects and engineers to avoid having to redo any design and structural work if they don’t have an idea of the estimated cost in the preliminary design stages.

Using the Square Foot Method for Last-Minute Bidding

Often used as a last-minute bidding tool, the square foot method is a fast, easy way to quickly submit a bid to entice a potential client without spending too much time calculating the details.

Consider this as a preliminary bid you can adjust later on once you’ve determined if you have a good chance of landing the job.

Using the Square Foot Method to Prepare a Budget Estimate

The key to using the square foot method to prepare a budget estimate is historical data.

The more projects you have that are similar in type, the more data you collect on the average cost per square foot for that project type.

You’ll begin to see a trend that you can use as a guide to making a simple budget estimate.

Think of it as using your historical data to prepare a comparable budget for the same project type, in the same way that a realtor might use historical market data for comparables to determine a sale price.

Pros and Cons of Using the Square Foot Method

The square foot method is quick and simple. It is especially useful when calculating the construction labor costs of common and consistent projects. Unfortunately, this method has vulnerabilities and potential risks. 

Disadvantages of the square foot method include:

  • May not always account for variances or delays

  • Lacks precision and nuance

  • Has a high potential for disputes due to limited transparency

  • Inadequacy when handling complex and unique projects that require specialized tasks, intricate designs, or custom finishes

#3: Rule of Two Method

The rule of two is a basic construction labor cost formula.

When calculating your construction labor cost percentage, from experience you know that about 40-50% of construction costs are labor.

If you’ve already got an idea of what your labor costs are from either experience or using a cost database, you can multiply that amount by 2 and add 10% for safety.

Just like that, you’ve got a prompt and effortless estimate. 

Pros and Cons of Using the Rule of Two Method

The rule of two methods is useful if you have a clear scope of your construction labor cost percentages. It also only gives you a rough estimate. This method does not account for actual costs and instead is reliant on experience-based guesses and estimations. 

The pros of the rule of two method include:

  • Quick to arrive at an estimation

  • Simple

The cons of the rule of two method are that it:

  • Relies on estimations

  • Does not account for nuances and complexities

  • Does not consider real or historical project costs

  • Does not accurately account for cash flow needs

How CM Fusion Helps Make Calculating Construction Labor Cost Simple

With CM Fusion’s construction management software, calculating construction labor costs is simple and fast thanks to features like:

  • Real-time over/under tracking

  • Tracking labor materials and fixed costs

  • Custom codes and categories

  • Unlimited timesheets

  • Tracking time on multiple projects

  • Tracking time by CSI code

Organization is at the tip of your fingers on your mobile device or in easy-to-read downloadable PDF documents. 

CM Fusion’s construction project management software can lift the heavy burdens of forecasting difficult labor costs.

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Utilize Historical Data

When it comes to calculating labor costs in construction, two things are important - cost and time. 

CM Fusion provides easy access to historical data with cost-tracking software and time-tracking software.

CM Fusion’s software gives you confidence in knowing that your labor cost estimates are based on proven historical data.

Gone are the days of waiting to get quotes back from subcontractors and suppliers.

Instead, you can plug the figures right into the software for swift cost labor calculation.

Cost Tracking Software

The revolving door of change orders and invoices is inevitable and can quickly turn even the best-designed spreadsheets into a nightmare.

You can say goodbye to antiquated spreadsheets and the dreaded “#ref” error.

With the custom codes and categories feature, you can create your own custom codes to track material costs or select a standard code from the CM Fusion code library.

Now, CM Fusion’s cost-tracking software makes categorizing, real-time adjusting, and calculating future construction labor costs effortless and straightforward.

Time Tracking Software

Time tracking is made easy with the unlimited CM Fusion cloud-based timesheet platform. 

The entire crew can access and complete timesheets on the app from anywhere with an internet connection. 

No more punch cards and handwritten timesheets.

CM Fusion’s time tracking software offers centralized project management capabilities like multiple project time tracking. 

This automated, streamlined system makes it clear and easy for you to estimate labor time costs, eliminating stacks of paperwork and lost profitability.

Take Advantage of Earned Value Management

It’s no secret that you want your forecasted schedule, cost, and scope for each project to be as close as possible to the actual values when completed. 

Based on those values, you use your earned value management to better predict future projects and make adjustments accordingly. 

Together, the construction cost tracking and time tracking features of CM Fusion’s software provide valuable data to know exactly what your earned value management is.

CM Fusion offers a faster, easier, and more accurate project management solution to help you calculate your construction labor cost-efficiently, leaving time for you to churn out more bids. 

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