While demand for construction projects and services continues to increase, a growing shortage of skilled construction workers is impacting overall labor costs and project profitability. It’s estimated that the construction industry needs to attract just over 500,000 new workers to meet demands in 2024, which is easier said than done.
Since labor costs make up a significant portion of all construction costs, knowing how to calculate accurate estimates and finding ways to reduce labor costs are key.
What are Labor Costs?
First, let’s clarify what counts as labor costs. Your labor costs include all direct costs of hiring construction workers and all other personnel needed for a project. This may include costs for excavators, concrete or masonry workers, plumbers, electricians, painters, and other construction crew members. It includes not only their wages but also any benefits, like healthcare and overtime, and payroll taxes that are your responsibility.
How to Calculate Labor Costs
Next, you need to determine the best way to calculate labor costs for your business. The unit pricing method multiplies the hourly rate, or the unit price, by the time needed to complete each unit. For example, if plumbing costs $100/hr. per worker and you need 50 hours of work, you know it will cost $5,000. You then add in the cost of materials, overhead, supervision, worker benefits, and any other necessary markup to figure out your total costs and bid amount.
You can also calculate costs using the square foot method, which uses historical data to estimate the average cost of new projects by square footage. There’s also the “rule of two” method, which relies on your contractor’s experience and estimates labor costs as 50% of your project’s costs. If your contractor can estimate labor costs, you simply multiply that amount by two to find total costs. Choose whichever labor cost calculator works best for your project.
Consider Digital Tools to Help Reduce Labor Costs
While the low supply of workers is driving labor costs up, there are steps your company can take to mitigate its impact. Using digital tools and mobile apps, like construction software, can better manage your workforce and operations, help reduce overall labor costs, and ensure your projects stay profitable — even in times when profit margins are smaller. Below, we’ve also put together a list of tips you can implement to further reduce labor costs.
5 Ways to Minimize Your Construction Labor Costs
Embracing technology can help you maximize labor costs and productivity, making your projects more efficient and profitable. Consider following these tips to reduce your construction costs:
1. Optimize Workforce Management
Mastering resource allocation and scheduling is essential for improving project efficiency and reducing labor costs. Closely tracking project phases and knowing when to bring in trades or equipment and in what order for each site minimizes delays in moving and using heavy machinery and labor. Having to wait for a team to finish at another site can cause you to miss deadlines and increase expenses. And if workers feel rushed to complete a job, it may result in lower-quality work.
Fortunately, it’s easy to optimize your workforce management using digital tools such as time tracking, punch clocks, and field reports. Project managers, contractors, and other back-office workers can easily see where trades and equipment are on a given day, if teams are staying on schedule, and address scheduling or resource issues immediately. These tools also reduce the administrative burden on laborers and field supervisors, allowing them to focus more time on their construction projects.
2. Enhance Communication and CollaborationEffective communication between your back office and field team is crucial to drive down labor costs. Miscommunication can easily lead to delays, increased overtime, poor project management, and lower project profitability.
Mobile apps can deliver real-time field reports and project updates to your back office team so they know where workers, equipment, and materials are at any given time. Office workers will understand what’s happening on the job site each day and can more easily collaborate and communicate with field teams to keep projects in check.
Along with access to this key information, you may want to implement the following tips for more effective communication strategies:
3. Improve Productivity Through Training and Development
Employee development in the construction industry is essential for several reasons:
Consider using digital training resources along with tracking worker productivity levels. General contractors can quickly evaluate field workers’ performance while on the job site using a mobile app. This feature allows you to monitor productivity and correct problems early on, preventing larger issues from occurring.
4. Implement Safety Measures and Risk Management Practices
Construction is a dangerous industry, responsible for high rates of serious injuries and deaths each year, making risk assessment essential for maintaining a safe environment. In addition, on-site accidents and injuries can cause project delays and financial losses, driving costs up. Identifying potential hazards prevents accidents from happening in the first place and safeguards workers.
What actions can you take to better manage risk? First, conduct a risk assessment at the start of your project. Then, create and implement a risk mitigation plan with all stakeholders. Lastly, review and update your mitigation strategies regularly.
Your construction company must also stay in compliance with numerous OSHA regulations that aim to reduce hazards and help you develop safety programs, train employees, and report any incidents.
To further reduce accidents, consider developing a workplace culture of safety and risk awareness by:
You’ll also need to ensure staff has appropriate certifications or training for their role. Keeping track of required certification is easy with the right digital tools. You can quickly digitize records, filter by type, and notify workers when their certificates are close to expiring.
5. Leverage Data Analytics for Performance Insights
Data gets created at every step of your construction projects and from back office activities. You can collect and analyze critical information about labor costs, on-site work, cost of materials, project expenses, team performance, and more. Project managers and field supervisors can use data to ensure projects stay on time and within budget, see what’s driving costs, and find areas for improvement. Contractors can also use historical data to help create better estimates for new bids.
How do you access this data? Digital tools like Data Drop allow you to extract data from multiple sources into custom databases. Making it easy for you to run data reports from your preferred analytics tool. Just make sure you’re following best practices for data-driven decisions, like integrating your systems and consolidating all your data so you’re seeing the complete picture.
How hh2 Helps Reduce Labor Costs
The gap between the supply of skilled construction workers and demand for new construction projects isn’t closing any time soon, which is why it’s critical to find additional ways to reduce labor costs to stay profitable. Embracing technology can drive greater efficiency and cost savings in your construction labor management.
With over 20 years of industry experience, hh2 understands the challenges construction companies face and offers a range of apps and digital tools that connect your field and back office to build efficiency across your business. See how we can reduce your construction labor costs with a demo of our Remote Payroll and HR Bundle.