Understanding construction labor costs is essential for good project management and improving construction KPI metrics. In this post, we’ll give you some pointers on calculating and tracking labor costs efficiently.
Construction labor costs: Fast facts
According to the industry-standard Construction Labor Market Analyzer (CLMA), labor cost percentages in construction lie between 20% and 40% of the total project’s budget.
Costs that fall under the labor umbrella include not just wages but also things like:
- payroll taxes
- paid time off
- worker’s compensation and other forms of insurance
- equipment such as vehicles and company phones
- payroll fraud (which is more common and subtle than you might think)
- recruiting and training costs
As you can see, construction labor costs are very multi-faceted. In some cases, it may even be the most complex aspect of project financials.
Average Construction Labor Rates
Before we dive into how to calculate labor costs in construction, let’s look at the average rates for various types of work. This is based on national data from the U.S. Bureau of Labor Statistics. It includes averages across the entire construction workforce for the specified types of projects.
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How to calculate labor costs in construction
When calculating construction labor costs, the goal is generally to uncover the base rate and labor burden. These two metrics, when added together, will help you determine construction labor rates accurately.
Here’s how to calculate labor costs in construction based on these two metrics.
Calculating your base rate
Your base rate is simply the unit (i.e. hourly) cost of labor. You arrive at this figure by adding up the various rates each worker on a project is paid. Say, for example, you have a construction crew that looks like this:
- Foreman: $30/hr
- Concrete Pourer: $28/hr
- Framer: $25/hr
Your base cost for this crew would be $30 + $28 + $25 = $83.
Of course, this doesn’t tell the full story. As we mentioned earlier, there are other labor-related costs you need to factor in.
The labor burden metric identifies a few of these factors.
Calculating your labor burden
Labor burden includes state and federal fees for each worker. These fees pay for things such as the Federal Insurance Contributions Act (FICA), Federal Unemployment Act (FUTA), Medicare, and Social Security at the federal level as well as the State Unemployment Tax Act (SUTA).
You’ll also typically need to pay General Liability and Worker’s Compensation.
According to the IRS, federal employee expenses as of 2020 are 7.65% (FICA) and 6% (FUTA). The percentage allocated to SUTA can vary, of course, depending on where you live. It might be 3% or perhaps even lower or higher. We’ll stick with 4% for the purposes of this example.
Here’s what your labor burden calculation might look like based on these state and federal figures. Keep in mind that you’ll also need to incorporate General Liability and Worker’s Compensation based on whatever rate your company has received.
- Foreman ($30/hr): 7.65% FICA + 6% FUTA + 4% SUTA = $5.295/hr
- Concrete Pourer ($28/hr): 7.65% FICA + 6% FUTA + 4% SUTA = $4.94/hr
- Framer ($25/hr): 7.65% FICA + 6% FUTA + 4% SUTA = $4.4125/hr
Those figures (plus, remember, General Liability and Worker’s Compensation at your company’s rate) inform you of your labor burden for each employee.
From here, all you need to do is add the labor burden and cost for each employee, which gives you a construction labor rate of $97.6475 per hour.
While our calculations thus far give you a decent approximation, they’re not perfect. In addition to leaving out General Liability and Worker’s Compensation, we haven’t incorporated benefits – another cost that varies far too widely across North America for us to provide a meaningful generalization.
Incorporating these costs on your own is simple, however. Just take the monthly expenditure on these items, divide them by the units of work (hours) and you’ll have you figure.
What may be less obvious, however, are the inefficiencies you also need to account for. These can be staggering.
Analysis has consistently shown that a large percentage of workers (43% according to one study, to be exact) exaggerate the number of hours worked. One commonly-mentioned statistic from the American Payroll Association indicates 42 minutes of time theft per day, per employee.
If you don’t include this figure when calculating your labor cost percentage in construction, you may find yourself constantly puzzled about cost overruns.
Thankfully, this is also simple to address. At an average of 42 minutes per day, simply tack an extra 70% of one hour’s wages to your worker’s daily base cost.
This will give you a conservative estimate of how much the worker is costing you, including time spent being unproductive.
Side note: Time theft doesn’t have to be inevitable
Construction companies have been fighting against time theft for centuries. In 2020, however, there are many tools you can leverage to reduce the detrimental impacts. Bridgit Bench, for example, allows you to track workforce utilization rates. This will very clearly indicate whether your team is being used to its full capacity.
Check out this article for a list of construction project management tools, some of which also help with reducing time theft.
The bottom line is that you have options for dealing with time theft. It’s still a very persistent type of fraud so you’ll want to factor it into your calculations somehow – but you can work to minimize it (and get numbers specific to your company and its workers in the process).
Tying it all together
Of course, your calculations don’t end at figuring out hourly rates (not including the construction closeout process). You can take those figures and uncover more meaningful metrics. Here’s how that might look, sticking with the numbers we’ve used so far.
- $97.6475/hr (base cost and labor burden) + $7.2625/hr (assuming 42 minutes of time theft for each employee daily, spread out over an eight-hour workday) x 40 (assuming a total workload of 40 hours per week) x 26 (rough number of weeks in a six month period, assuming that’s the length of the project) = $109,106.4.
That would be a reliable estimate of your construction labor costs for the entire project.
Remember the question we addressed earlier – what percentage of construction cost is labor? This is where you can compare. If your labor costs are far beyond the 20% to 40% average throughout the industry (or data you’ve collected, if you have your own), you may have some work to do in addressing the exorbitance.
The importance of knowing your construction labor cost
Done right, construction labor cost calculations can lay a solid foundation for accurate estimates. After all, construction companies arguably have a larger degree of control over labor costs than, say, material costs.
Now that you know how to calculate labor costs in construction, you’re well-equipped to have meaningful conversations about project financials.
Check out this article for some more tips on successfully managing construction projects.