When it comes to job costing, the most apparent construction project expense to calculate (aside from materials) is labor. Like material pricing, labor costs have been on a dramatic uptick. Some businesses have reported that they're spending the same amount of money for site maintenance workers as they are for seasoned professionals.
With almost half of project expenses going to labor (sometimes upwards of 50 to 60%), a clear and accurate picture of your labor costs is crucial to maximizing productivity and future revenue.
However, labor costs are about more than just hourly and salary rates, and with a sustainable method for managing them, it's much easier to bid profitably and avoid overrun.
By implementing reliable processes and tools for managing labor costs, construction firms can:
This guide will show you how to accurately calculate labor costs (regardless of the size or style of the project) and includes tips, strategies, and tool recommendations that take the guesswork out of labor cost analysis, estimation, and management.
Operating a construction company contains many moving parts, all of which are made more challenging by restrictive regulations and taxation demands. To make compliance management more accurate and consistent, you must clearly understand labor costs' three main categories.
Direct Labor Costs are the most straightforward expenses, encompassing:
Indirect Labor Costs are tertiary costs in the form of:
Overhead Costs are sometimes overlooked when calculating labor costs, but they're integral to having a true grasp on cost. They include:
Tracking labor costs is complicated enough in any industry, but there are variables (many unique to this industry) that add a lot of extra work, result in many additional expenses, and create unnecessary headaches for your team.
One of the most problematic and expensive issues is the use of inaccurate timesheets. A single construction company juggles multiple job sites at any given time, so the same employee or subcontractor (and the equipment/tools they use) could visit multiple sites per day.
If the employee is particularly busy (and let's be honest, there's a reason construction is as mentally exhausting as it is physically), they may:
All of these issues can lead to your payroll specialist spending extra hours correcting mistakes and chasing down missing timesheets when processing weekly payroll (leading to them manually entering timesheets, trying to get approval, depositing or mailing out checks, etc.).
Across the board, business owners everywhere are struggling to hire and keep skilled workers. With the cost of living escalating at a steady click, workers need higher wages to compensate. This problem increases the labor costs of construction businesses trying to stay competitive both as employers and service providers.
The U.S. Bureau of Statistics revealed that private construction workers' salaries and wages have increased by 20% since 2018. But why?
Because there are fewer qualified professionals to go around, construction businesses have to pay more for workers. They also struggle to get workers to show up consistently. This complication causes disruptions in project timelines due to fewer hands on-deck, and when new hires are brought on board, the projects can take longer due to their lack of experience.
One of the construction industry's biggest barriers to entry is the strict (and continuously evolving) compliance restrictions. These play an especially large role in labor cost management because many of these laws are directly tied to variables like:
This means it isn't just about getting the most out of every dollar. Accuracy, consistency, and organization are crucial to avoiding fees or civil suits.
For example, in 2023, the IRS uncovered more than $4 MILLION worth of cases in civil employment tax penalties, which equaled penalty payments (nationally) exceeding $1.5 billion.
With the US construction industry alone reaching over $2 BILLION in 2023, the average construction company juggles multiple projects on any given day. Each of these projects requires specific skill sets, equipment, and workers to complete. Add the near inevitability of adjusting to changes in project scope and timelines, and keeping track of labor costs becomes an even greater hurdle without the right tools and approach.
Calculating labor costs accurately is essential for construction companies to maintain profitability and keep projects on budget.
Here’s a step-by-step guide to help you calculate labor costs effectively:
Start by identifying the hourly wage of each worker or crew member. This includes both base wages and any fringe benefits like health insurance, retirement contributions, or paid time off. For example, if a worker earns $25 per hour and receives $5 per hour in benefits, their total hourly wage is $30.
Next, calculate the labor burden, which includes additional costs like payroll taxes, workers’ compensation, and insurance. Labor burden typically ranges from 20% to 40% of the total hourly wage.
Formula: Hourly Wage x Labor Burden Percentage = Labor Burden
For instance, if the labor burden is 30% and the hourly wage is $30, the labor burden adds $9.
If workers exceed standard working hours, include overtime pay. Overtime is usually 1.5 times the regular wage. For example, if a worker earns $30 per hour, their overtime rate would be $45.
Make sure to track and include any overtime hours worked to ensure labor cost calculations are accurate.
Not all workers operate at the same productivity level. Consider how much work each employee can complete in a given time. This is called the productivity rate. For example, if an employee takes 8 hours to complete a task that’s expected to take 6 hours, the labor cost increases due to lower productivity.
Now, you can calculate the total labor cost per employee by summing the hourly wage, labor burden, and any overtime or productivity adjustments.
Formula: (Hourly Wage + Labor Burden + Overtime Adjustment) x Hours Worked
= Total Labor Cost per Employee
Once you know the labor cost per employee, multiply it by the total number of employees and hours worked over the entire project to estimate the total labor cost. For example, if 10 workers are on-site for 40 hours a week for 4 weeks, multiply their individual costs by the total hours.
Labor costs can fluctuate due to changes in wages, overtime, or labor laws. Regularly review and adjust your calculations to ensure accuracy.
By following these steps, you can accurately calculate labor costs, which is essential for managing project budgets and ensuring profitability.
💡 Pro Tip: Using software to track hours worked, productivity, and payroll data can simplify this process and help avoid errors, keeping your labor costs in check.
IBISWorld reports that, as of 2023, there are over 3.9 Million Construction businesses in the US (growing by 3.4% since 2022). To position your construction business for growth, adaptability, and with an eye to the future, try the following practices that can help you achieve consistent growth and competitive advantage:
Even if you put a solid labor cost management system in place, it's not a "one-and-done" solution. Regularly audit labor cost data and monitor performance metrics so you can adjust strategies based on project outcomes and feedback. By doing this, your business can act proactively, which means more financial flexibility.
Businesses across the spectrum are struggling with hiring and retention, so it's crucial to prioritize employee satisfaction and engagement. Here are a few strategies that you can use to nurture a positive work culture:
No matter what route you choose for your labor cost management, it's important to support your team with training and professional development opportunities. Continuous education and upskilling promote productivity and confidence to keep you at the forefront of industry developments and regulation.
Regardless of how large (or how many) teams you're leading, it can be easy to only focus on immediate priorities and deadlines. However, one of the best ways to stay competitive is by staying ahead of what's happening in your industry.
From monitoring changes in labor laws and regulations to watching for innovations in machinery and technology, keeping your finger on the pulse keeps you ahead of the game.
While the construction industry is synonymous with hard-working, human hands, it's also one of the first places technological innovation influences. But that isn't just regarding "in the field" tech (like drones, mobile tablets–or even augmented reality (AR) tools for development).
Your back office benefits greatly from advances in automation and digitization because they save countless hours of labor, practically eliminate the risk of human error, and optimize the accounting process for accuracy and compliance. Regardless of the size of your construction business, integrating payroll and project management systems can boost productivity and drive revenue.
Many construction businesses approach labor cost management (and a majority of their administrative processes) manually.
To illustrate this point, a Clutch report revealed a staggering 25% of small businesses still use old-fashioned pen and paper to track their finances — and that adds up quickly. According to an Ernst & Young study, each "by-hand" HR task (like payroll entry) costs US businesses almost $5.
However, one of the biggest problems with manual data entry is the risk of human error. And, frankly, calling it a risk may be an understatement as it's more so an inevitability.
According to a 2024 Gartner survey, 18% of accountants admit to making data-entry (financial) errors on a daily basis, while nearly 60% knew they'd made multiple errors per month. And that's just the mistakes they caught.
One of the most valuable ROI strategies you can implement to improve and reduce labor costs is automation software — here's why:
Work with your team to understand exactly how your current processes function — and the biggest issues they cause. By doing this, you can identify the areas that need the most immediate attention and find software specifically designed to solve them.
The right technology can help you analyze and streamline your scheduling process, making sure everyone is exactly where they need to be when they need to be there. Streamlining your scheduling processes can help avoid overlaps that could mean less productivity or unnecessary overtime costs.
Making time sheets easy and accessible on mobile devices makes it simpler for workers to log their time, and automation helps keep things organized by accurately connecting the entered hours under the appropriate job code.
Digitizing the process and centralizing it on one platform makes it exponentially faster to process payroll, keep bookkeeping clean, and make getting approval a breeze.
Even if the initial cost of a digital time tracking system may seem high, the money it saves (via time and resources saved) yields an undeniable ROI almost immediately.
That doesn't even include the boost to morale with peace of mind, less stress, and a more pleasant working experience.
Even if you're ready for automation to improve labor cost management, not just any tool will do. Construction demands key features because of:
Here's what construction companies should look for in time tracking and payroll software:
With a short list of software solutions to investigate and the top features to look for, we'll close out this deep dive with a summary of the ROI that labor cost management software yields:
There's never a wrong time to optimize any component of your back-end processes. From payroll and job costing to field reporting and enhancing the interconnectivity of your current stack, every step you take toward efficiency means more revenue in your pocket — and less stress on your team.
With an oversaturated market, varying product reviews, and trying to figure out what tools are going to help you grow versus those that are just eating away at your bottom line, it can be tough to choose a tool to help. Rest assured, the following list shares some of the top-rated construction labor management and payroll software we believe are worth investigating.
One of the most established digital accounting software options around, QuickBooks Time is a great solution for construction companies already using and enjoying QuickBooks. With a variety of plan options, users can take advantage of everything from basic tracking features (like the timecard app) to advanced tools like geofencing and expense tracking.
For those who aren't ready to make large upfront investments, Clockify is an excellent solution. Free for unlimited users, user-friendly, and offering convenient features like PTO management and GPS tracking, it also integrates with accounting and productivity apps like QuickBooks and Trello.
iOS, Android, and web compatible, Buddy Punch optimizes scheduling, payroll processing, time tracking, and beyond. Its portability makes it great for clocking in and out on the go. While it doesn't offer a free trial, its price point is very affordable.
hh2 cloud-based construction platform was built by contractors for contractors. Powering over 3,500 construction sites, hh2 connects the field and office seamlessly, eliminating the frustration and costly errors associated with manual payroll. Fast and flexible, it captures, codes, routes, and approves time without complicated spreadsheets and messy paperwork.
Want more information on the top construction payroll software built for construction business owners by construction business owners? Book your demo today to speak with one of our experts to find out how hh2 can help you master your construction labor cost management.