Guide to calculating direct labor budget in construction

Guide to calculating direct labor budget in construction

Labor is among the most expensive line items in any construction company’s budget, accounting for roughly 50% of the average project’s cost. Consequently, labor budgeting is a highly impactful activity. Keep reading to learn more about construction labor budgeting and the tools and techniques professionals use to do it more efficiently.

Why construction labor budgeting is important

First, let’s discuss the importance of labor budgeting.

Help stakeholders predict and understand labor costs

Without a labor budget, stakeholders (including owners, contractors, etc) are missing key contextual information that would help them better understand the project’s feasibility (or lack thereof).

A specific labor budget can be helpful to see even when an overall budget exists since labor presents unique risks to be considered.

Highlight resource management flaws

Labor budgeting can reveal surprising gaps in a construction company’s resource management strategy. This is true for two reasons:

  1. The process of construction labor budgeting forces professionals to gather and evaluate data.
  2. A labor budget allows stakeholders to ask probing questions and ensure plans properly address all concerns.

Balance labor costs with other concerns

While labor is an essential part of the construction industry, it’s not companies’ only concern regarding projects. A labor budget allows construction management professionals to compare labor costs to those associated with other line items (i.e., materials, energy, transportation, etc).

Reduce labor costs

Ultimately, effective labor budgeting helps organizations better manage labor costs. It can highlight inefficiencies and give construction management professionals the necessary information to evaluate their organizations’ current workforce capacity.

Are you losing money from people left on the bench?

GCs can now see the financial impact of underutilized labor and reallocate people, intelligently, with the new Bridgit Bench Cost module.

See how it works →

6 Tips for effective construction labor budgeting

Next, let’s look at the concepts, tools, and strategies that help construction companies compile effective labor budgets.

1. Understand the value of direct labor budgeting

A direct labor budget estimates how many labor hours are required to deliver a specified unit of work (i.e. square footage of construction or manufactured units of an item). It also provides the estimated cost of those labor hours.

Calculating a direct labor budget requires a few steps:

  1. Determining the hourly cost of labor
  2. Deciding on a unit of production
  3. Calculating how many labor hours are required to produce one unit of production
  4. Using the above information to determine the cost of labor per unit
  5. Calculating the full direct labor budget by multiplying the cost per unit by the total number of units required for the project

One advantage of direct labor budgeting is that it helps quantify the labor required for a project, giving construction management professionals a better idea of how many workers are needed. They can subsequently manage human resources more efficiently (i.e., hiring more workers or taking on additional projects depending on the gap between capacity and demand).

Another advantage of direct labor budgeting is that it can help management professionals determine an appropriate figure to bill customers, whether a percentage markup from the direct labor budget or an amount calculated using some other approach.

2. Budget for direct and indirect labor costs

As we discussed in our article on the topic of calculating construction labor costs, any given construction company’s investment in labor goes far beyond worker salaries. Construction companies incur several indirect labor costs as well, such as:

  • payroll costs (i.e., taxes and administrative work)
  • time theft (i.e., buddy punching)
  • recruitment and training costs
  • paid time off

Failing to account for these costs while labor budgeting can leave your company with a gross underestimate of its true labor costs.

3. Use purpose-built construction labor management software

Labor management in construction is unique. The industry’s unique requirements mean that many general labor budget calculation methods and applications offer little value to construction management professionals.

Instead, savvy construction management professionals use dedicated construction labor management tools such as Bridgit Bench.

In addition to supporting labor budget calculation methods specifically useful for construction professionals, purpose-built construction labor management software applications such as Bridgit Bench integrate with other industry-standard applications, such as Procore.

Read our list of workforce management software solutions (including Bridgit Bench).

4. Understand how your contractors have arrived at their estimates

A construction company’s labor budget is only as reliable as the labor budgets its contractors have assembled. Consequently, you must understand how your contractors have arrived at their figures and account for any potential weaknesses in their methodologies.

Otherwise, you may find your labor budget blown up by cost overruns resulting from delays on the part of your contractors.

5. Collect and analyze labor management data outside the context of individual projects

While labor budgeting in the context of individual projects is important, savvy construction professionals collect and analyze labor management data continuously. This ensures that, when it comes time to conduct labor budgeting for a specific project, they have all of the necessary contextual information, such as:

  • what is their organization’s current labor capacity
  • whether specialized resources (i.e., equipment or personnel with unique knowledge and certifications) can take on tasks requiring their specialization
  • how much financial wiggle room their organization currently has in the event of cost overruns

6. Confront risks in your labor budgets and make plans to address them

No labor budget is so perfectly designed that it has zero risks. This isn’t a sign of weakness on the part of construction management professionals but reflects the nature of work in the construction industry, which can be impacted by everything from the weather to supply chain issues.

Smart construction management professionals are honest about the existence of these risks and take meaningful steps to address them, such as managing workforce utilization rates in such a way that no team is ever stretched so thin it can’t respond to unexpected circumstances.

Life before & after Bridgit Bench

Watch how leading ENR 400 contractors have leveled up their workforce planning by leaving their spreadsheets behind.

See all of our customer stories →

Construction labor budgeting: Conclusion

We hope this article has helped you understand the best practices of construction labor budgeting. For more articles about construction project management, visit our blog. Learn more about how Bridgit Bench helps construction companies manage resources more effectively.

Brandon-Richard Austin Headshot

Brandon-Richard Austin

Brandon-Richard Austin is a writer and content strategist focused on the construction sector. He’s passionate about educating readers on construction management techniques and best practices.