The construction industry is growing, and the demand for construction materials and services is increasing. The increased demand and subsequent shortage of skilled construction workers have led to higher construction labor costs. Construction contractors must find a way to succeed regardless.
Construction companies must understand how to estimate costs to stay in business. Cost estimation is often tedious and time-consuming. Three methods can help you calculate labor costs. Read more about unit pricing, square foot, and the rule of two methods.
Knowing how to calculate construction labor costs accurately can help businesses win bids and finish projects on time and within the budget. Traditional construction labor calculation methods can lead to inaccurate estimations. However, there are three methods that you can use to calculate labor costs more accurately.
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What are labor costs
Labor costs are the direct cost of hiring construction workers and other personnel to complete a job. Labor costs include hiring excavators, masons, electricians, painters, and other construction workers.
Understanding and estimating labor costs is critical to submitting a realistic and profitable bid. Contractors must understand their actual labor costs instead of focusing on submitting the lowest bid.
How to calculate labor costs in construction
The traditional way of calculating labor costs is time-consuming and inefficient. Many contractors try to calculate labor costs by relying on subcontractors or calculators. This traditional method is unreliable because it takes all the control from the contractor and places it on the subcontractors.
Relying on subcontractors risks your business because your bids are in their hands.
Contractors need to write realistic bids based on accurate estimates of labor costs. The goal is not to submit the lowest possible estimate but to set realistic expectations from the onset. Submitting an unrealistically low bid and then increasing the costs later will only annoy your clients.
Rising construction labor costs are unavoidable due to the increasing demand for construction services. Contractors can ensure they get the right labor cost estimates using three methods: unit pricing, square foot, and rule of two methods.
Unit pricing method
The unit pricing method is ideal for calculating construction labor prices. It is great for use in project design and bid estimates. The unit price method involves multiplying the hourly rate (unit price) by the time required to complete one unit.
For instance, building a wall at an hourly rate of $40 per worker and you need 12 hours of work will cost you $480 to build the wall.
After determining the direct labor cost, you can factor in the material costs to estimate the total direct costs. You can add overhead, profit, supervision, and other necessary markups to determine your bid.
You can get this data from a cost database if you do not know the unit pricing for each type of labor. Cost databases collect pricing data from construction businesses throughout the country. This data is updated regularly and provides contractors with average costs to use as a starting point.
As a contractor, you can also calculate your actual unit price to estimate more precisely. Multiply the direct labor hourly rate by the time required to complete assembly to get your total labor costs.
Calculate material costs separately and add this to the total labor cost to get your total direct costs.
Next, divide the total labor cost by the square footage to get the labor cost per square foot.
You can then add the cost per sq. ft to your database and do the same computation for each type of item until you have everything you need for the project.
Finally, add the supervision, project duration, equipment, profit, and overhead to determine your final bid price.
Square foot method
The square foot method is popular among contractors due to its strategic benefits. It is valuable for prospecting, as a last-minute bidding method, and preparing budget estimates. This method is also called the budget tool.
Prospecting using the square foot method allows contractors to align themselves with engineers and architects who may require budget pricing early. Engineers and architects can avoid altering their designs or structural work if they know the cost in the preliminary design stages.
The square foot method is a fast and easy way to submit a bid to a potential client because it reduces the time spent calculating the details. The square foot method helps create estimates based on historical data.
As a contractor, you should collect data on each project type's average cost per sq. ft. As you collect more data, you will determine a trend that can inform future budget estimates.
Rule of two method
The rule of two is a basic construction labor cost formula based on your experience as a contractor. For example, labor costs typically comprise 40-50% of total project costs.
If you know your labor costs, multiply that number by two and add 10% for contingency. Use a construction labor database if you do not know your labor costs. Find the average labor cost and use that number to calculate your total cost.
You should know how long things take to benefit more from the “rule of two” method. You should be able to adjust your estimates to cover custom items, difficult working conditions, complexities, and field conditions. Your ability to make adequate adjustments will make your estimates more accurate.
Many contractors lose bids because they do not dedicate enough time to create estimates. Contractors are understandably busy and typically resort to the traditional way of estimating, which is both time-consuming and inefficient. The traditional way does not guarantee accuracy.
Construction labor costs vary depending on the nature of the project, so contractors must know how to properly create a labor cost estimate. The best methods for calculating labor cost in construction include unit pricing, square foot, and the rule of two.