The cost of construction labor should not only be appealing but also realistic.
If you’re working under pressure, you could end up giving inaccurate estimates that can lead to loss of business, angry customers, low-profit margin, etc.
And having said that, here are three sure-fire methods you can use to accurately calculate the cost of labor, no matter how much pressure you’re under.
1. Unit Pricing
In small construction projects, you can estimate the man-hours for a specific job. But if the job gets to a certain level of scale, more techniques may be used. The easiest way to calculate the labor cost is to get an estimation of units. This involves determining how long it will take to lay the foundation, build walls, install fixtures and fittings, etc.
At first, this requires a detailed take-off and the requirements for each job. Keep in mind that the non-productive hours should also be considered. This may include site conditions, illness, and weather.
When calculating the actual cost of labor, you should not just use peak productivity rates. You can get an inaccurate figure when you estimate that everyone will be working `full steam ahead’ with nothing slowing them down. In real life, many things could have an impact on productivity or lead to overtime.
If you want to get an accurate average cost of construction labor, you can use the National Construction Estimator. When dealing with construction jobs where you can’t just rely on experience, you need an estimator. It takes into consideration everything that will be included in the construction work.
It’s estimated that working 10 hours a day for one week can lead to loss of productivity by 20% in two months. Similarly, working for more than 12 hours a week can result in a loss of productivity by 40%. To eliminate any doubt out of the equation, you should consider all the hazardous materials involved in the construction, temperatures, etc.
External factors also come into play. You should incorporate specific overheads that can affect the actual cost of labor. If you have full-time employees, you should take the annual rate and divide it among the workers until you get accurate hourly figures.
The concept of unit pricing ensures that you don’t have too many skilled people sitting idle at the construction site. Also, the project will not be understaffed. As a contractor, you should come up with the lowest possible bid to help you produce accurate and realistic costs. This will give you the confidence to pursue contracts without falling below the unacceptable margins.
Measure the Quantity and use the Pricing Database
A more generalized approach to calculate the cost of construction labor is to use the pricing database. It gives an estimate based on labor and overheads to be involved. More specifically, the cost is calculated by considering the different work involved in the project and the national average wage rate. Many construction companies use this method as it gives an accurate estimation that falls within the 20% cost of the final project.
To increase accuracy and productivity in the team, you should use the best software available. Some come with a set of programs and formulas to ensure you get an accurate estimate. Before you embark on the construction project, you should ensure your database includes the actual labor costs in the region.
2. The Cost of a Square Foot by Hourly Tate Method
About 40-50% of the construction cost is labor. Therefore, building contractors should know the cost of labor based on the square foot. In commercial buildings, the cost of labor is estimated to be $175/SF while in residential construction it’s $150.
While using the cost per square foot may sound elusive at glance, it can help you get accurate data on the cost of labor. But let’s face it: the cost of labor for houses in the metropolitan region can be less compared to those at the heart of the city. On average, the cost of labor per hour is $27. However, this will depend on the area the construction is taking place.
But you can also calculate the cost. If you need a carpenter, you simply type `the cost of a carpenter’ in your zip code. Then, divide the cost by $27 and you’ll get a multiplier of 0.93 or 1.05. To ensure you get an accurate cost of labor, you should multiply the cost of labor per square foot ($75 X 1.05).
Ask any experienced contractor and they will tell you that the cost of labor cost is lower when you have a large building area. While a bigger house will cost more to build, the cost of labor per square foot is low. But here is the catch; all rooms are not created equal. Generally, bathrooms and kitchens have complicated integrations so the cost of labor per square foot is higher.
The Rule of 2
Since the cost of labor accounts for about 50% of the total costs, you can estimate the cost of labor. You just take the average in your area and divide it by 2. To ensure you get an accurate figure, be sure to add the cost of equipment rentals and supervision costs. The cost of labor will vary based on the city and state. For instance, you expect the cost of labor in the suburban area of Ohio to be lower than the metropolitan area of California.
In some tasks, the cost of labor tends to be higher. For instance, you should expect to pay more in design projects because the skills required are extensive. The foundation work is also very expensive compared to roofing or painting. If you bid too close to your margins, you could end up struggling to meet the cost of labor.
3. The Historical Budget Method
When calculating the actual cost of labor, you should consider the historical data on construction projects. But this will only be useful if you leave room for changes that may inevitably occur. Of course, it must be close to the set standards by the construction industry. To ensure you get an accurate cost per square foot, you should review the actual construction cost for last year.
If you’re a contractor, you should calculate the actual amount you spent on the previous projects. Still, you can divide the cost by square foot to get an accurate cost. When you do this for a couple of projects, you’ll realize a certain pattern will emerge. With that information, you can segment the cost based on the type of construction. You can easily calculate the cost of a restaurant, single-family home, multi-family, mixed-use, high-rises, retail, etc.
There’s a caveat to using the historical data so you must be cautious. A change in relative price could have a big impact on the cost of labor. It’s worth mentioning that systematic changes in labor costs could make it difficult to predict the actual cost. Secondly, it can be difficult to foresee some of the problems that may occur during construction. Therefore, as you use the historical data be sure to factor in an increase in costs. A change of design may also affect the actual cost of labor. Finally, you should consider inflation as it can greatly affect the estimated cost.
Short in the Dark Technique
Before you start a construction project, you should take a guess and aim high. As you calculate the estimated construction labor cost, you should aim high without sacrificing on the profit margins. If you want high-quality construction workers, you must be willing to pay more. Since the construction project will vary from one project to another, you should leave room for adjustments. By using the short in the dark technique, it’s much easier to avoid overspending on labor.
The two factors that determine the actual cost of labor is direct and indirect costs. Since direct costs involve the wages you pay your employees, they may seem simple to calculate. But when it comes to indirect costs, then that’s another story.
The short in the dark technique will allow you to incorporate costs like payroll taxes, employee benefits, workers’ compensation, training, uniforms, etc. To get an estimated cost of labor, you should add both direct and indirect costs. More importantly, you’ll know the actual amount to pay the employees beyond the salaries.
Negotiate the Labor Cost with the Client
If you’re a contractor, performing an accurate cost of labor will determine the success of your project. Depending on the relationship you have with the client, the price you give is not always final. Some will say the cost is high and may request that you adjust by a specific margin. Nevertheless, you should show them you’re concerned about the changes and how you came up with an estimate. You can also give them ideas on how they can save money on other areas of the construction project.
To help the client see the bigger picture, you should show a breakdown of the labor cost for a specific period and then compare it with the industry standards. When determining the base rate, be sure to consider the average people you can work with. If you don’t charge the client all the employee expenses, you could be losing some money.
Clients considering large construction projects will often look for multiple cost estimates from contractors and independent estimators. Therefore, you should make sure the cost of labor meets the scope requirements and financial feasibility.
The cost of labor in construction is not something you should take lightly. If you’re not careful, it can interfere with the actual cost of the project. Depending on the location, this could take about 50% of the total costs. A crucial step in getting an estimate is calculating the total number of labor hours involved in the project.