How to Calculate Labor Cost in Construction: 2 Effective Methods

Learning how to calculate labor cost in construction is essential for hitting profit margins. Incorrect projections for labor cost percentage in construction are often responsible for inaccurate estimates. Contractors and construction companies need uniform systems for calculating costs for construction labor if they want to submit bids that hold up.

Two Methods for Calculating Construction Labor Costs: Bottom-Up and Unit Pricing

There are two main ways to calculate construction labor costs: the bottom-up estimate and unit pricing. Both will save you time while providing more precise numbers.

With bottom-up estimating, a contractor develops an estimate by factoring in individual costs, task duration, and resource requirements. The total generated can estimate either the full cost or “section” costs. Bottom-up estimates can be updated as a project progresses. Evolution of an estimate is sometimes necessary in cases where contractors have to fill in data gaps with educated guesses.

The unit pricing method for estimates uses projected completion times to deduce labor costs. This is the option for you if you want to base your estimates on “known pricing”. Hourly rates per employee are multiplied by the time required to complete a “unit” of the project. When providing a client with a price estimate by square footage, labor costs can also be divided by total square footage to create a cost-by-square-foot labor estimate.

Of course, the bottom-up and unit pricing methods for estimating construction costs both have plenty of nuances. Contractors can tweak these tried-and-true formulas to get accurate pricing for jobs of all sizes.

Start With Your Base Labor Rates

Base labor rates in construction are the hourly rates that workers are paid for their work on a construction project. These rates are typically set by the contractor or project owner and are used to calculate the project’s overall cost.

Base rate is determined using the hourly rate of a worker. This might look like:

• Foreman: $40 per hour
  
• Concrete Pourer: $20 per hour
  
• Framer: $25 per hour

The base cost for this crew of three is $40 + $20 + 25 = $85 per hour.

The base labor rate does not include any overhead or indirect costs: it is simply the cost of the worker’s time. Base labor rates can vary significantly depending on the trade and the project’s location.

A contractor needs to know the rates for each of the trades being utilized on a project. Cost codes that pull data from past jobs allow contractors to accurately factor in labor costs. Standardization among employees within the same trade is important for managing costs throughout a project’s duration.

Calculate Your Labor Burden

Your base labor rate is just one component of your labor burden. Your total labor burden combines your base labor costs with your indirect labor costs.

To accurately calculate labor burden, you need to combine the base labor rate with your labor burden rate. Your labor burden rate is the percentage of the base labor rate that goes to indirect costs like benefits and payroll taxes. These indirect costs are:

• State and federal fees for each worker.
  
• Federal Insurance Contributions Act (FICA)
  
• Federal Unemployment Act (FUTA)
  
• Medicare
  
• Social Security
  
• State Unemployment Tax Act (SUTA)
  
• General liability and workers’ compensation
  
• Payroll fraud
  
• Recruiting and training costs

Indirect costs can vary based on the state where you do business, the types of services you offer, how much you invest into employee development, how much travel is required to complete jobs, and how much coverage is needed to keep your business legally secured.

The labor burden rate will depend on many factors but is about 25% on average.

Using the example of the crew paid $85 per hour in total, we can see how to calculate labor burden for a group of workers.

Let’s assume the crew works 40 hours per week. The base labor rate is $85 x 40 = $3,400 per week.

So, to get to your actual labor burden, take $3,400 x 25% = $850. Then, $3,400 + $850 = $4,250 per week.

Here’s a more detailed rundown of how to calculate labor burden, and here’s our handy labor burden calculator to simplify the process.

Next, the all-in labor rate incorporates all of the direct and indirect costs per employee to create a total rate for all employees per project.

Calculate All-in Labor Rates for Your Team

Your all-in labor rate is how much it costs per hour to pay for all the labor involved in a project.

Using the example above, we have 3 crew members working 40 hours a week, so 120 hours worked per week in total. Our labor burden is $4,250, so to get to our all-in labor rate we divide $4,250 / 120 = $35.41.

Labor burden estimates are rarely so simple. Don’t forget about overtime! Having tools for accurately calculating overtime for both salaried and non-exempt hourly workers is critical to price your labor.

The Bottom-up Estimate Method

The bottom-up estimate method identifies all of the different tasks that need to be done in terms of hours. It uses the mindset that a project’s total cost is the sum of its parts.

The bottom-up method is generally preferred among general contractors juggling projects of different scopes and sizes. Bottom-up estimating also accommodates the constant changes that contractors face when going from project to project.

The first step is always laying out every single task involved with a construction project. A contractor must create a comprehensive work breakdown that includes all the work to be done and estimates of time to completion. No task is too small when doing a bottom-up estimate.

For example, a contractor creating an estimate for a full construction project must price out plumbing, painting, brickwork, and other components as though they are pricing out individual projects.

Of course, the biggest benefit of the bottom-up method is that it can be tweaked throughout the span of a project. Its flexibility allows contractors to make adjustments over time related to cost and delivery timelines.

Calculating Construction Labor Cost With the Bottom-up Method

This method involves summing the labor costs for each individual task involved in the project. These task-level labor costs are then rolled up to an overall project labor cost estimate. This approach can be time-consuming, but it can be very accurate if done properly.

This method allows for easy identification of which tasks are most responsible for the overall labor cost of the project.

When calculating labor cost using the bottom-up method, a contractor is compiling all of the total labor estimates to determine the total labor cost for the entire project.

A bottom-up contractor would begin by counting back from the promised/projected completion date. With the date in mind, they would collect estimates for how much each task within the full scope of the project costs based on the number or employees needed per hour to total hours needed to complete the task on time.

Calculate this by multiplying the total labor costs per section based on the all-in labor rate, the number of employees needed per hour to hit a deadline, and the total number of anticipated hours worked based on the projected deadline.

The accuracy of the bottom-up method depends on knowing how long each stage will take in workhours and your all-in labor rate for each kind of work. Say you want to estimate the labor cost of pouring a concrete slab as part of a larger project.

All-in labor rate X number of workers X number of weeks X 40 hours per week

Using the numbers from the earlier example, let’s assume you’ve done a bottom-up estimate and determine a deadline of 3 weeks for your crew to complete one stage of the project. Your all-in labor rate is $35.41, you have 3 workers, 3 weeks, and 40 hours per week, so your labor cost estimate for that project stage is:

$35.41 x 3 x 3 x 40 = $12,747.60

Then repeat this process with each stage of the project: framing, electrical, plumbing, drywalling, etc., using your all-in labor cost for each type of work. Add all those numbers together to get your total labor cost for the project.

Preparing Estimates With the Bottom-up Method

While many contractors prefer the bottom-up method because of the level of detail it offers, it’s not a perfect method.

A contractor who relies on the bottom-up estimating method can’t give rough on-the-spot estimates to clients. Of course, the appeal of the bottom-up method is that it provides a greater degree of accuracy. It also puts a contractor in a position to provide a detailed, itemized breakdown that creates a sense of transparency between the contractor and client.

It helps to dig into the pros and cons of bottom-up estimating when determining if this is the right choice.

Pros	Cons
Accuracy. There is no glazing over important cost factors the way there could be with generalized estimating that looks at the whole instead of the parts.	Hyper-Focused. Bottom-up estimating is vulnerable to oversights caused by ignoring overhead and other “big picture” costs.
Flexibility. As a project moves forward, it’s common for costs to shift slightly. Generally, the bottom-up method leaves more room for these errors to balance out without drastically impacting the entire budget cost.	Time-Consuming. Bottom-up estimating can eat up a lot of time at the beginning.
Complementary. You can use bottom-up estimating in conjunction with other estimating techniques. You can use data from a few different methods to come up with an average.	Knowledge-Based. Knowing exactly how long each aspect work will take makes the stakes very high. Any miscalculation along the way could drastically alter the timeline and cost estimates.

The Unit Pricing Method

The unit pricing method takes a wildly different turn from the bottom-up estimating method.

The unit pricing method is commonly used to calculate labor prices in project design and bid estimates. When referring to the unit price for labor, we’re referring to the figure created when the hourly rate is multiplied by the time required to complete one unit of a project.

Unit pricing is a popular option among contractors performing repeatable, predictable tasks. For example, a drywaller may find that the unit pricing method allows them to provide precise, consistent estimates with very little estimation work needed.

Calculating Construction Labor Cost With the Unit Pricing Method

Let’s say that a drywaller knows the labor rate to construct a wall is $50 hourly per worker. The drywaller also knows that installing 100 square feet of drywall takes an hour. To install 1000 square feet of drywall will require a total of 10 hours of labor. So the labor cost for this job is $500.

Here’s a simple formula for calculating unit price for labor uniformly across all projects:

• Step 1: Use a sample project that’s been completed to separate your total labor costs from your material costs. The labor costs separated out represent the all-in labor costs for that project.
  
• Step 2: Divide the costs by total square footage of the sample project (Labor cost/square footage = Labor cost per square foot).
  
• Step 3: Add that figure to your database for use as an estimating resource.

The unit pricing method generally builds a 10% buffer into labor costs when providing estimates to clients to account for losses and inefficiencies.

Preparing Estimates With the Unit Pricing Method

Unit pricing is considered the automated method for estimating labor costs because you’re plugging the cost of labor per square foot into future projects. Its biggest benefit is that it is highly repeatable. Of course, looking at the pros and cons of the unit pricing method makes it easy to see where this method can either shine or fall short.

Pros	Cons
Time-Saving: Contractors don’t have to spend nearly as much time to make an estimate.	Broad. The estimate provided by unit pricing doesn’t always factor in project-specific details.
Easy Estimates = More Bids. Contractors can submit more bids and get more jobs.	Non-Specific. Unit pricing falls apart once a contractor needs to compile an estimate for a larger project consisting of lots of varied tasks. Unit pricing is uniquely suited for contractors offering repetitive services.
Area vs. Time. The unit pricing method is focused on “area covered” instead of “time covered” like with the bottom-up method.
Improvable. Unit pricing estimates can get better over time. A contractor will get increasingly accurate data when using data from real projects to constantly update the “time needed per unit” for each job.
Experience-Based Data. Unit pricing doesn’t rely on outside sources for pricing information. Contractors use their own internal data based on previous projects to quickly generate new estimates.

Accurate Labor Time Tracking Is Critical for Both Methods

Labor can account for 30% to 50% of the typical construction project. Miscalculating labor means miscalculating a project estimate. For contractors, this can ultimately mean taking a loss if an estimate is submitted with inaccurate information.

The most important thing for contractors to learn when estimating labor is that estimating labor costs essentially means accurately predicting project duration. While hourly labor costs are fixed, the number of total hours needed is the true wildcard when costing a project. That’s why the true emphasis is actually on working your way backward from the project deadline to determine the following:

• How many total hours of labor are needed to complete a project.
  
• How much can be accomplished per worker per hour.
  
• How many workers are needed in total per day through the length of the project to cover the labor hours needed.

Many contractors rely on experience when compiling estimates. There is a place for this mentality. However, past experience with costing cannot be the only factor used to determine labor estimates.

The experience-alone method leads to misconceptions about how long things take. Ultimately, relying solely on historic labor costs from previous projects robs a contractor of the ability to make insightful labor estimates.

By not doing a detailed estimate for labor costs, contractors can miss out on opportunities to understand where time is going on projects. When there’s no accountability for time, contractors are ultimately facing an issue where both unit pricing and bottom-up estimates are going to be off from true costs.

Using the estimating process as an opportunity to capture data is powerful.

When done correctly, every new estimate serves as an opportunity to save money. For instance, a contractor may find that a large percentage of labor costs are being directed toward tasks that don’t necessarily generate the greatest cost benefit within the project. This presents an opportunity to reevaluate the process used to complete these money-losing tasks. This is just one example among the countless ways that contractors can use the estimating process to fix inefficiencies to reduce labor costs.

The last thing any contractor or construction company wants to do is to pass on inflated or fraudulent cost estimates to clients. Nearly half of American employees admit to exaggerating the number of hours worked. Several surveys show that employees steal up to an hour each day using various time-skimming methods.

Even employees who don’t blatantly lie on time cards may still be stealing time. Data from ADP shows that 89% of employees admit to wasting time at work every day. Half of those who admitted to wasting time shared that they wasted at least one hour per day.

If you own a construction business, these stolen costs show up the estimates you present to clients. This is why accurate time-tracking software becomes vital for creating accurate estimates. Far too many contractors simply accept the costs of wasted and stolen time.

One hour lost a day per employee can significantly increase labor costs throughout a product’s duration. Just think of an hour day wasted per person on a crew of 10. It adds up to 220 paid hours stolen from an employer over the course of an average month.

App-based time cards, GPS tracking, accurate scheduling, and other dynamic features that automate and track employee time management can reduce time theft.

How To Estimate Construction Labor Costs With Workyard

Workyard helps construction businesses effortlessly create accurate labor estimates by giving them an accurate framework for determining costs. The construction workforce management software that’s already trusted by thousands of contractors, Workyard helps contractors improve profitability by managing and measuring their work crews through a single app.
In addition to helping construction businesses track work time by employee, the platform also provides tracking per job and cost code. Businesses can capture actual time spent on projects to create accurate estimating on future projects. Estimates get better over time with every interaction between the Workyard app and your employees because the platform uses dynamic modeling to turn every minute on the clock into an insight-generating resource. Find out how Workyard automatically generates labor-cost data you can use to drive profits.

The bottom line is that the accuracy of the information you’re using to make labor cost estimates will always be more important than the particular method you’re using. Run every project through a construction cost estimator using your own data once you make the switch to better time-tracking technology.