How to Calculate Labor Cost in Construction Accurately

 July 9, 2021 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. CM Fusion: Simplifying Labor Cost Calculation With Historical Data
  2. The “Traditional Way” of Calculating Construction Labor Cost and Why You Shouldn’t Use it
  3. How to Calculate Labor Cost in Construction 3 Different Ways
  4. How CM Fusion Helps Make Calculating Construction Labor Cost Simple

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. Simple features like time tracking and cost tracking keep you organized and on budget. 

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

Not to mention, the time tracking and cost tracking features save historical data for you to reference and streamline your next labor estimate for construction.

The “Traditional Way” of Calculating Construction Labor Cost and Why You Shouldn’t Use it

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.

How to Calculate Labor Cost in Construction 3 Different Ways

You don’t want to give your subcontractors the kind of power that can tank your bids.

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, 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 to 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 the 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 this 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, then you add the duration of the project, equipment, supervision, profit, and overhead to get your final price.

#2: Square Foot Method

The square foot method is a commonly used method because of its multiple strategic benefits. 

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.

If not, you should be.

Through prospecting, you can align yourself with architects and engineers who may need budget pricing early. 

This allows architects and engineers to avoid having to redo any design and structural work if they don’t have an idea of 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.

#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.

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 and tablet 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.

Utilize Historical Data

When it comes to calculating labor cost 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 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 calculating.

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.

Try CM Fusion, risk free for 30 Days – Your first project is FREE!

If you are trying to figure out where to look now, our company CM Fusion offers a free version of Construction Project Management Software. Not to mention, our customers brag about it’s ease of use, so you should be able to sign up and start managing your projects in minutes.

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