How To Calculate Labor Cost In Construction

The national average for construction workers, according to the U.S.  Joint Economic Committee, is $19.14 an hour but hourly wages are not the only thing you’re paying for labor. 

There are other factors to consider and if you don’t know how to properly calculate it, you can end up going severely over budget. That’s why it’s very important for you to understand how to calculate labor costs in construction.

What Exactly Is Labor Cost?

Labor cost is the amount the employer pays for each employee to work for their company. 

It would be a lot easier if all we had to consider was the employee’s hourly wage. However, labor costs involve much more. There are direct and indirect costs, all associated with true labor costs.

Why Is It Important To Calculate Construction Labor Costs?

As with all aspects of your cash flow, you need to have a clear picture of what you’re spending versus what you’re bringing in. If you don’t know what your true labor costs are, you risk underbidding jobs and/or under- or over-paying employees.

It’s difficult to budget as well, if you don’t have accurate data about your construction labor costs.

Understanding Construction Labor Costs

When calculating your labor costs for construction, you need to understand the different types of payments associated with it. Most labor costs are either direct or indirect costs. Some of these costs may be variable while others may be fixed.

For example, the cost of labor to run machinery is variable, based on how much you use it. You can increase or decrease variable labor costs by increasing or decreasing the use of that machine. Conversely, fixed labor costs might include set fees for long-term contracts, such as scheduled maintenance for the machine.

Base Rate

The base rate of labor costs is the amount each employee is paid per hour. If you have a small crew of a laborer, framer, and a team lead, you would calculate their collective hourly pay rate as your base rate for having that team on a job.

For example, if the laborer makes $15 an hour, the framer makes $25, and the team lead makes $40, your total base rate for one day will be $80 for each hour worked per day.

Laborer: $15

Framer: $25

Lead: $40

Base Rate: $80/hour

Labor Burden 

Labor burden includes more than your hourly base rate. You have to consider the extra you pay for things like:

• Insurance
• Taxes
• Benefits
• Meals
• Supplies
• Training

While each company is unique and perhaps you don’t offer benefits, there are still things to consider. For example, do your employees drive company vehicles home? Do they use your tools or their own? All of these things would contribute to the amount you’re actually paying to have that employee working for you.

Direct And Indirect Costs 

The best way to define the differences between direct cost and indirect cost in construction is that direct costs are the expenses specific to a particular project, and indirect costs are whatever expenses are left. Indirect costs are less defined and more variable like overhead, vehicles, and equipment.

Direct costs include things like material, labor, equipment, or subcontractor costs. These costs are usually less challenging to calculate because most often, they are allocated to a specific project or job and don’t vary much.

How To Calculate Labor Costs In Construction

Before you can calculate your labor costs, you’ll need to calculate your base rate and factor in your other direct and indirect costs. You can use a labor burden calculator to make it a little easier, but it’s still important to understand how to calculate labor costs.

We’ll use a hypothetical employee, Eddie, as an example. Eddie is an hourly, non-exempt employee, who works full-time in a construction company in California with more than 26 employees. He gets $22 an hour.

1. Calculate the Gross Pay

The first thing you want to do is figure out Eddie’s gross pay.  Here is the formula:

Calculate Eddie’s gross pay per year. The total hours that Eddie is supposed to work for the period of one year is:

Total number of hours per year = 40 hours per week x 52 weeks = 2080 hours

This means his gross pay per year is: 

 $22 x 2080 hours = $45,760

2. Figure Out the Actual Worked Hours 

The total work hours per year are 2080. However, every employee needs to take days off.  Let’s say Eddie missed 12 days in the year. Here is how to calculate hours not worked:

Then you can easily get the net hours worked:

Actual worked hours = total number of hours per year - hours not worked

This would mean, in this case:

2080 hours - 96 hours = 1984 hours 

The actual hours that Eddie has worked for a year are 1984 hours. 

3. Determine All Annual Costs Per Employee

Next, you have to take into account all related expenses that you owe for Eddie, such as taxes and healthcare. They come on top of her gross pay. Only after you calculate them can you get the actual labor cost per hour for a particular employee, or the true cost per hour. 

Some typical labor costs besides actual pay are:

Payroll Taxes:

• FICA taxes (7.65%), of which Social Security is 6.2% and Medicare is 1.45%
• FUTA taxes (standard rate of 6%, but exceptions apply)
• State unemployment taxes
• Local unemployment taxes 

Employee Benefits:

• Health insurance
• Additional insurance such as dental, life or disability
• Retirement plans
• Paid time off (sick and vacation days) 
• Meals at work
• Education and training 

Other Possible Expenses:

• Overtime pay
• Workers’ compensation insurance
• Work supplies

In Eddie’s case, here is the breakdown of additional labor costs:

• $3,339.07 annual taxes (6.2% Social Security is $2706.18, 1.45% Medicare is $632.90, 0.6% FUTA on the first $7,000 is $42, and California state unemployment insurance is 3.4% on the first $7,000, which equals $238   
• $3,100 health insurance
• $2,000 benefits
• $900 overtime 
• $500 meals

Thus, the extra annual costs that you have to pay for having Eddie as an employee is $10,119.07.

4. Calculate the Total Annual Payroll Cost

You are now ready to determine the actual annual payroll cost for Eddie, or the total labor cost for her. Here is how to do that:

In this example, the amount is:

$45,760 + $10,119.07 = $55,879.07

This is the total annual cost of Eddie’s work. 

5. Calculate the Hourly Labor Cost

Now you can figure out Eddie’s cost of labor per hour. 

His hourly labor rate (wage) is $22. However, you want to get the total cost per hour. Here is how you can do that:

For Eddie, calculations come up to:

$55,879.07 / 1984 hours = $28.16 per hour

Now you know the actual hourly labor cost for Eddie.

Implementing The Right Software For Estimating Labor Cost 

The right software will help you calculate your base rates and other costs much more efficiently. 

Track Labor Hours

With time-tracking software, you can get accurate, real-time hourly data about how much your employees’ rates are costing on the job. You can ideally filter by employee or job to get a fast report on how much you’re paying in base rates.

Track Job Progress

With the right software, you can stay on top of each job or project to have a clear idea about how long it’s taking, who is working on it, what types of equipment or materials are being used, etc. Each of these things will help you get a more accurate picture of your labor burden

Manage Jobs

With a software solution, you can have a centralized place to store records of expenses, making it easier to keep track of what is spent on each individual job or project. 

Improve Job Costing

With accurate time reporting and material data, your future job costing is made much easier and more accurate. When you have the cost of your actual labor burden - which is a part of your job costs - you are more likely to increase your profit margin. 

Calculate Labor Costs in Construction

Whether you choose to calculate labor costs manually, with a labor burden calculator, or with software, it’s important to get it right so you don’t lose money by underbidding jobs. If you find you’re frequently falling short on your labor costs, it might be worth it to invest the time it takes to truly calculate your labor costs in construction.

Cristina Johnson

Cristina is a former journalist and certified content marketing writer. She is a self-proclaimed foodie and loves animals, reading, and fishing.