Your company’s approach to setting its construction labor rates will ultimately have a huge impact on profitability. Keep reading to learn more about setting labor rates for construction projects, including helpful methods and tools.
How to calculate construction labor rates
Step 1: Calculate your base construction labor rate
Calculating your base construction labor rate is an important first step in understanding your costs.
It may make sense to run this calculation on a per-crew basis if your crews differ substantially in terms of what you pay each worker. The end result would be each crew having its own base rate.
Otherwise, if crews are fairly standardized across your company, you can run this calculation using averages.
Let’s look at an example.
Imagine the following construction crew:
- 1 lead paid $45 per hour
- 1 concrete pourer paid $30 per hour
- 1 concrete finisher paid $30 per hour
Your base rate for this crew is $105 per hour (the sum of their hourly wages).
Step 2: Calculate your labor burden
Of course, your base construction labor rate only tells half of the story. An employee costs you more than just their wage. You also need to consider costs such as:
- payroll taxes
- payroll administration
- vacation pay
These costs factor into what’s known as your labor burden. We explore this concept in greater detail in our article about calculating construction labor costs. Read that article and apply the methodology we share in it to determine your labor burden (again, either by crew or a company average if applicable) before proceeding.
Step 3: Add your markup
At this stage, you should understand how much the crew(s) in question cost you per hour. Next, you need to determine how much you should charge clients to ensure you turn a profit on projects.
What constitutes an appropriate markup will vary based on several factors, including:
- what type of construction work your company does
- your company’s size
- your objective for taking the project (i.e. building your reputation in a new market vs. earning a profit)
- how much money you’re investing into the project (i.e. purchasing new equipment or hiring new workers)
It may be worth researching average construction labor rates in your market to ensure you aren’t pricing yourself inappropriately relative to the competition.
The Construction Labor Market Analyzer is one such tool widely used throughout the industry to gain insights into commercial and residential construction labor rates.
In the process of calculating your markup, you may discover it only makes sense to take a particular project if it guarantees a certain number of hours of work. A clear sign of this would be if the hourly markup greatly exceeds the average rate for labor in your market. It may make sense to only accept jobs in this category once profits have exceeded a certain amount (i.e. the point at which your costs are covered and you’ve generated a minimum amount of profit).
Tips for calculating and optimizing construction labor rates
Now that you know the general process for calculating construction labor rates, let’s explore some tips for ensuring your calculations are as accurate as possible – and optimizing your labor rates once you’re certain they are.
1. Use data as specific to your work as possible
Construction is a very broad industry. Don’t make the mistake of relying on general construction labor rates. Instead, use numbers as specific to your company as possible. That might mean collecting localized data from a tool such as the Construction Labor Market Analyzer or (preferably) relying on your company’s own data (more on this in the next point) from past similar projects.
2. Use dedicated construction labor management software
Dedicated construction labor management software helps professionals collect and analyze company data more efficiently.
This proves useful at every stage of the construction labor management process – from coordinating crews based on productivity data (who works best together) to determining the minimum number of hours it makes sense to have a specific crew work.
Check out this article to learn more about the construction labor management applications we recommend.
3. Revisit your construction labor rate calculations periodically
Construction labor rates aren’t static. They changed based on market conditions, including the current demand for workers. It’s therefore important to revisit your construction labor rate calculations periodically. You may even want to run the numbers during the estimating process for every major project.
4. Choose the appropriate strategy for your needs
The construction labor rate calculation method we discussed earlier in this article is known as the unit pricing method. While it’s a very commonly-used method, it’s certainly not the only one out there, nor is it right for every single situation.
Other labor rate calculation methods include the following.
Square foot method
The square foot method entails pricing work not in hourly terms but, rather, in terms of how much the project would cost you per square foot of work completed.
This is useful in scenarios where you’d like to make an apples-to-apples comparison between labor and material costs. After all, it wouldn’t make sense to price materials per hour but labor certainly can be viewed in that terms, making it easier to adjust from that end.
Rule of two method
The rule of two method entails relying on the knowledge that labor generally accounts for roughly 50% of construction costs, with the rest being spent primarily on materials. Consequently, if your material costs are easier to calculate and/or predict, you may want to determine them first and fill in the gaps on labor using this method.
5. Avoid unnecessary labor costs
Not all labor costs are essential. In fact, some (i.e. forms of time theft, such as buddy punching) should be avoided as much as possible. This is another area in which tracking labor costs using labor management software is helpful; it becomes easier to spot patterns and make evidence-backed decisions.
Construction labor rates: Conclusion
We hope this article has given you some valuable tips for calculating and optimizing construction labor rates. For more articles related to construction management, visit our blog.