The Construction Cost Crisis: How to Rein In Your Two Biggest Expenses

Construction costs are skyrocketing. Labor shortages, material price volatility, and project inefficiencies are squeezing profit margins tighter than ever. If contractors don’t get a handle on their two biggest expenses—labor and materials—profits can disappear before the job is even complete.

Labor and material costs make up the majority of any construction project’s budget, yet many companies struggle with tracking and controlling them. Unplanned overtime, supply chain delays, and material waste drive costs up, often without contractors realizing the full impact until it’s too late.

The good news? You can take back control. By leveraging real-time tracking, automation, and smarter procurement strategies, construction companies can cut waste, boost efficiency, and protect their bottom line. In this guide, we’ll break down why labor and materials are draining your profits—and the proven strategies to rein them in.

The Two Biggest P&L Expenses in Construction

1. Direct Labor Costs

Labor is consistently the largest expense for contractors. Wages, benefits, and inefficiencies can drive costs higher than planned, cutting into project margins. Key cost drivers include:

• Wages & Payroll Taxes – The construction labor shortage is driving up wages, with 88% of contractors struggling to find skilled workers (AGC Labor Shortage Report).
• Union Benefits & Prevailing Wages – Public projects require compliance with prevailing wage laws, making payroll tracking complex.
• Overtime & Scheduling Inefficiencies – Unplanned overtime and jobsite delays inflate labor costs. Workers waiting on materials, equipment, or approvals are still on the clock.
• Workers’ Compensation & Safety Risks – High injury rates in construction increase workers’ comp insurance premiums.
• Job Cost Allocation Errors – Without proper cost codes, labor expenses get misallocated, making it hard to spot overruns early.

2. Material Costs

Materials represent another major portion of a construction project's budget, with costs rising due to supply chain disruptions, inflation, and poor planning. The biggest cost drivers include:

• Price Volatility – Prices for materials like steel, lumber, and concrete are unpredictable, making budgeting difficult (Bureau of Labor Statistics).
• Delivery & Scheduling Issues – Late material deliveries cause labor inefficiencies, while early deliveries result in storage costs and potential damage.
• Material Waste & Overages – Overordering wastes money, while underordering causes delays and costly last-minute purchases.
• Jobsite Theft & Loss – Tools, equipment, and materials disappear, leading to re-purchases and cost overruns.
• Vendor & PO Tracking Issues – Poor tracking leads to duplicate orders, missing materials, and inaccurate invoices.

These two cost categories—labor and materials—account for the majority of construction project expenses. If they aren’t carefully tracked and controlled, project budgets can quickly fall apart.

The Challenges of Tracking & Controlling These Costs

Labor Cost Challenges

1. Tracking Field Productivity – Without real-time labor tracking, inefficiencies go unnoticed until payroll time.
2. Overtime & Labor Overruns – Crews often work longer hours due to poor planning, late deliveries, or unexpected delays.
3. Payroll Compliance (Union & Non-Union) – Managing union wages, prevailing wage laws, and certified payroll adds layers of complexity.
4. Worker Retention & Training – High turnover leads to constant hiring and training costs, lowering productivity.
5. Job Cost Allocation Errors – If labor isn’t properly coded, finance teams struggle to identify where projects are losing money.

Material Cost Challenges

1. Fluctuating Material Prices – Market conditions make it hard to lock in costs, leading to unexpected budget spikes.
2. Poor Inventory & Procurement Management – Overordering or underordering drives up costs and creates delays.
3. Delivery & Scheduling Conflicts – When materials arrive too early or too late, crews lose productivity.
4. Theft & Mismanagement – Tools and materials are stolen, misplaced, or damaged, adding thousands in unexpected costs.
5. Inefficient Vendor & PO Tracking – Without centralized tracking, material costs spiral due to duplicate purchases and inaccurate invoices.

How to Take Control of Labor & Material Costs

1. Improve Labor Tracking & Productivity

Use Real-Time Time Tracking Software

• Mobile time tracking tools like Raken, ExakTime, and hh2 allow workers to log time accurately with GPS tracking and job cost allocation.
• These tools prevent time theft, payroll disputes, and incorrect labor coding.

Optimize Scheduling & Workflows

• Match crew schedules to material deliveries to minimize idle time.
• Use historical labor data to predict realistic timelines and reduce unplanned overtime.

Automate Payroll & Job Costing

• Cloud-based payroll tools like Sage 300 CRE, Viewpoint Vista, and Procore help contractors manage union wages, certified payroll, and prevailing wage compliance.
• Automating payroll prevents manual errors, miscalculations, and compliance risks.

Invest in Training & Retention

• Providing ongoing safety and skills training reduces turnover and improves efficiency.
• Employee retention programs reduce hiring and onboarding costs.

2. Control Material Costs & Reduce Waste

Implement Job Costing & Inventory Software

• Construction ERPs like Sage 300, Viewpoint, and Procore track real-time material costs, orders, and waste.
• Automated material tracking prevents duplicate orders and theft.

Negotiate Bulk Purchasing & Lock in Pricing

• Contractors who buy steel, lumber, and other bulk materials in advance can reduce costs by 10-15%.
• Locking in prices with vendors early stabilizes project budgets.

Optimize Procurement & Inventory Control

• Digital purchase order (PO) tracking ensures materials arrive when needed—without costly overages or shortages.
• Centralized material tracking prevents missing inventory and theft.

Use Digital Field Reports & Jobsite Audits

• Field teams should track daily material usage, deliveries, and waste to spot cost issues before they escalate.
• Regular jobsite audits help identify areas where materials are being wasted or stolen.

✅ Streamline Vendor & PO Management

• Cloud-based accounts payable (AP) solutions like hh2 Document Flow improve invoice tracking and approvals.
• Centralized PO tracking prevents over-purchasing and mismanaged vendor payments.

Final Thoughts

Labor and materials are the two biggest P&L expenses in construction, and poor tracking, inefficiencies, and cost overruns can quickly erode profitability. Without the right tools, managing these costs becomes a constant battle—manual payroll processes, time-consuming invoice tracking, and labor misallocation can leave contractors scrambling to stay on budget.

That’s where hh2 Remote Payroll and Document Flow come in.

• hh2 Remote Payroll simplifies labor tracking by automating time entry, job cost allocation, and payroll processing—all while ensuring compliance with prevailing wage laws, union rules, and certified payroll requirements.
• hh2 Document Flow eliminates invoice headaches, automating accounts payable, syncing purchase orders, and providing real-time visibility into material costs to prevent budget overruns.

With hh2’s cloud-based solutions, contractors can gain full control over labor and material expenses, reduce waste, and protect their margins—without adding administrative burden.

Ready to take control of your labor and material costs?

Schedule a demo today and see how hh2 can transform your back-office operations.