How to Compute Labor Cost in Construction

January 31, 2024

Accurate labor cost estimation is critical for construction companies to be able to submit competitive bids. Inaccurate estimates can lead to a variety of problems, including budget overruns, missed opportunities, and, in extreme cases, business failure.

Fortunately, there are a few easy ways to calculate labor costs in construction. By using job costing, implementing time tracking software, and streamlining payroll processing, contractors can reduce their labor costs, boost productivity metrics, and increase profitability.

There are several methods for calculating labor costs in construction, but the most common method is to use a unit pricing model. This method requires separating your labor and material costs, and then dividing them by the total square footage of the project to get the all-in labor cost per square foot. This method is especially valuable for prospecting, bidding on projects with set timelines, and preparing budget estimates.

Another option for calculating labor costs in construction is to use the bottom-up method. This method involves breaking a large project into smaller sections and estimating the number of workhours needed to complete each section based on your all-in labor rate and the scope of work. Once you know how long each section will take in workhours, you can add in overhead, profit, supervision, and equipment to determine your final bid price.

Another factor to consider when calculating labor costs in construction is the labor burden, which includes all employee-related expenses that go beyond hourly wages. This can include things like overtime pay, transportation allowances, and accommodations. These additional employee benefits can quickly eat into profit margins if they are not accounted for ahead of time. This is why it is essential to include them in your labor cost calculations and build them into every estimate you provide to clients.


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