Labor and materials are among the most significant costs construction companies incur. Keep reading to learn more about labor vs material costs in construction, how they compare, and how smart construction management professionals keep track of both types of expenses.
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Labor vs material cost in construction: Overview
What are construction labor costs?
When construction professionals calculate labor costs, they typically include items such as:
- employee and contractor compensation (amounts paid directly to workers)
- payroll costs (including taxes)
- paid time off
- employment-related insurance (i.e. workers compensation)
- recruitment and training costs
- time theft and other forms of fraud
Check out this article we wrote explaining construction labor costs in greater detail, including how they’re calculated.
What are construction material costs?
Construction material costs, meanwhile, include amounts paid for materials (i.e. bricks, concrete, clay, lumber, etc) used to build structures. Often, materials must be procured, imported, and transported to job sites, which is also factored into construction material costs.
Construction labor cost vs material cost: Percentages
The percentage of labor vs material costs in construction can vary wildly depending on the sector and type of work being completed. Ballpark figures range from 40% to 50% of construction costs being tied to labor, with most of the remaining amount going to labor, followed by miscellaneous costs.
Keep reading as we share thoughts regarding how to arrive at a more accurate figure for your company’s projects.
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We partnered with Construction Dive to outline the steps any contractor can take to be more strategic with their workforce management.
6 Tips for calculating labor vs material costs in construction
1. Take direct and indirect labor costs into account
As we hinted at earlier, labor costs aren’t limited to the hourly wages construction companies pay their employees and contractors. There are several other costs to take into account, such as payroll taxes, paid time off, and union dues. Construction HR professionals refer to these as indirect labor costs.
Tracking indirect labor costs is important since they can be quite significant relative to direct labor costs; leaving them out of the picture will result in your company having an inaccurate understanding of its true expenses.
According to The Construction Labor Market Analyzer, direct labor costs, on their own, often account for 20% of a project’s overall cost. When combined with indirect labor costs, however, the total expense can climb to 40% of the project’s cost – a 50% difference.
2. Use dedicated construction resource management software
The days of tracking construction labor and material costs in Excel spreadsheets are over. Today, there are purpose-built resource management tools (such as our Bridgit Bench) that can help construction companies track expenses and demand related to both labor and materials.
One significant advantage of using these tools (as opposed to general tools such as spreadsheets) is that they integrate with other construction management applications, thereby fitting into your organization’s workflow more cohesively.
3. Track costs at an organizational and project level
While tracking labor and material costs on an organizational level is helpful for understanding your company’s overall profitability, don’t forget to pay attention to costs in the context of individual projects as well. This can help your company capture more granular information, such as which types of projects are most profitable.
4. Familiarize yourself with proven strategies for estimating construction labor and material costs
There are many tried and tested methods for estimating construction labor and material costs. Common approaches include the following.
Unit pricing method
As its name suggests, the unit pricing method entails dividing the amount of work to be completed into smaller units and associating a price with each one.
For example, a flooring contractor working on a 2,000 square foot home might calculate their labor and material costs based on:
- How much they’ll pay for one square foot of materials
- How much time it will take them to install one square foot of materials (and what direct and indirect labor costs are associated with that)
The rule of two
Given that between 40% and 50% of the average construction project’s cost goes towards labor, you could estimate the entire project’s budget by determining either the expected labor cost or the expected material cost.
For example, if you predict labor will cost your company $100,000 for the project’s duration, you could extrapolate and predict an additional $100,000 for materials.
This is known as the rule of two. It can be a valuable time-saving technique for arriving at a rough estimate of a project’s cost since it eliminates the need to calculate both portions.
5. Keep in mind labor costs are often more flexible than material costs
A key difference between construction labor costs vs material costs is that the former can vary substantially whereas material costs tend to be more predictable.
For example, a flooring contractor with enough experience can comfortably predict (with a great degree of accuracy) the quantity of materials required to complete a project based on its size.
Labor costs, meanwhile, are much less predictable. A professional with several years of experience might take 10 hours to complete the job whereas someone with less experience might take 15. Costs could even lie beyond the contractor’s control if, say, the job is an outdoor one and weather conditions prevent them from working.
It’s important to keep this in mind when calculating construction labor costs vs material costs. Savvy construction management professionals apply a greater degree of flexibility to labor cost predictions.
6. Know what can impact construction labor and material costs
Construction labor and material costs are each subject to the influence of different external factors.
For example, factors that often influence labor costs include:
- the level of experience a particular professional or team brings to the job
- the current market rate for labor (particularly when it comes to hiring contractors)
- how much overtime is needed to complete the project
Factors that often influence material costs, meanwhile, include:
- costs throughout the entire supply chain (including manufacturing, shipping, and importing materials)
- the quality of materials being used
- the current market rate for materials
Proactive construction professionals monitor these factors to stay ahead of any substantial changes to their expenses.
Labor vs material cost FAQ
How did the Great Recession and the COVID-19 pandemic impact the construction industry’s labor market?
The Great Recession of 2008-2009 led to significant job losses in the construction industry with many skilled laborers being laid off or leaving the construction sector altogether. This pain is still felt today. The COVID-19 pandemic didn’t do the construction industry any favors; through halted, stalled, and slow construction projects, the pandemic has contributed to a persistent labor shortage in the construction industry.
What technologies are construction firms historically hesitant to adopt, and why?
Construction firms have been slow to adopt new technologies such as advanced software for project management and workforce planning, augmented reality tools for planning and visualization, and drones for site surveying. It’s difficult to find a single cause for this hesitation. Instead, a combination of factors such as a lack of familiarity and exposure to these technologies, concerns about time and training required to implement, and the perceived cost of adopting such tools. There may also be a cultural component, as the construction industry has successfully relied on manual processes and might resist changes that disrupt standard operating procedures.
How can Bridgit Bench help with communication to improve workforce management?
Breakdowns or gaps in communication can have a direct impact on the cost and complexity of a construction project. Large construction projects have many moving parts, and Bridgit Bench addresses this by providing a centralized platform for communication and flow of information between teams. Bridgit Bench provides insights about your workforce and lets you plan based on capacity, capabilities, and experience. Planning is a key component in reducing misunderstanding and improving coordination and communication among office and on-site workers.
Bridgit Bench is a leading construction resource management application
We hope you’ve found this article helpful for understanding the breakdown between construction labor costs vs material costs. Learn more about how Bridgit Bench helps construction companies calculate and track resource costs and usage. For more of our articles on the topic of construction resource management, visit the Bridgit blog.
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.
