How to accurately estimate project labour costs in construction
Calculating project costs is a crucial step to planning any successful project – as is accurately estimating labour costs. As one of the biggest project costs, labour is arguably one of the most difficult parts in determining an accurate estimate.
Whether you’re in specialty contracting, fit-out and joinery, residential or commercial construction, inaccurately estimating labour costs can be the difference between a project success or fail. Incorrect estimates can result in profit loss, loss of business and credibility, strained customer relationships and tense internal relationships, to name a few.
While experienced smaller businesses might be able to take an accurate guess on the hours and scope required to complete a job, larger projects require more detailed estimations – meaning more room for human error and inaccurately quoting labour costs.
Important factors in labour costing
Direct and indirect costs
Before jumping in and calculating your labour costs, it’s important to understand the two main components in determining accurate costing – direct and indirect costs.
Direct labour costs: These values are more straightforward. They are simply the wage you pay each team member that is involved in the project you’re costing for.
Indirect labour costs: These are all the other variables that must be considered such as employee benefits, holidays, taxes, training and development, uniforms, workers compensation, company vehicles, phones and labour productivity.
Depending on where your project is based, it may also be worth factoring in other conditions such as weather.
The indirect costs listed above can soon add up, and without factoring these variables, you won’t be able to get an accurate labour cost estimate for each project.
Labour productivity
While it would be ideal to think each project will consistently operate at optimum efficiency, it isn’t realistic. As most team members in construction are aware, it’s commonplace for external factors to slow down a project such as issues with subcontractors, delays in materials, equipment failure and environmental conditions.
Long or extended working hours can also play a large part in the decline of labour productivity. With extended hours often resulting in both physical and mental fatigue, it can lead to decreased work output and lower efficiency.
Keeping in mind the likelihood of wavering labour productivity rates will be another crucial step in accurate estimating.
Calculating labour costs
Determining your base rate
A base rate is the unit (i.e. hourly) cost of labor. As one of the most straightforward variables to measure, it serves as a good starting point for determining your overall labour costs.
To determine your base rate, you’ll first need to calculate the hourly rate of each team member required for the project. Once you’ve collected this data, you can add the hourly base rates together to find the total base rate for the project.
Here’s an example:
- Foreman: $55/hr
- Electrician: $47/hr
- Apprentice: $25/hr
The base rate for this team would be $55 + $47 + $25 = $127.
However as mentioned above, there are several other factors to include.
Determining the ‘actual’ base rate
The ‘actual’ labour rate includes other costs for each team member outside of their hourly wage. This includes the indirect costs mentioned above such as holidays, taxes, employee benefits, training etc.
As a majority of the indirect costs are calculated annually, you’ll need to divide these costs by the hours worked per year for each team member.
Note: This calculation may differ from business to business. You may need to chat with your accountant or financial controller to determine the best approach for calculating your indirect costs.
Next, you’ll add the hourly indirect costs calculated for each employee to their base rate (hourly wage mentioned above). Repeat this for each team member on the project to get the actual hourly labour costs for the project.
Total labour costs
Putting it all together, use the formula below to determine the total labour cost for a project.
(teams actual hourly rate) x (number of weeks) x (hours in a week) = labour cost of project.
Depending on project conditions, you may want to also factor in an overtime component.
Overhead
Instead of using indirect costs, some businesses may instead choose to determine their overhead and add this to their employees base rate. Your businesses overhead includes all indirect costs we’ve mentioned above, in additional to everything else required to run your business. This includes office rent, accounting and IT costs etc.
Improving labour costing accuracy
Reviewing past projects
Reviewing past projects can be a great point of reference when determining labour costs. You may have undershot the costs in a previous project and can learn from where you went wrong. Similarly, you can use previous successful projects as a template for future estimating.
Gantt charts
Gantt charts can also be a good tool to utilise when estimating the cost of labour. With a gantt chart visually showcasing required tasks and time progress intervals, it can be helpful to ensuring each project is properly staffed (eliminating too little or too many team members at once).
Review your data
Construction teams can be constantly changing. Each team member may work under a different rate or have other external factors to consider. Double-checking your data is a simple way to ensure your labour costs are as accurate as possible.
Use a project management system
Moving away from manually calculating labour costs will not only be more accurate, but will save a considerable amount of time. This is especially beneficial for construction businesses with tight turn around times! A project management system, such as Nexvia, allows you to create budgets for your projects, add planned costs for specific tasks and include labor rates for your team. Your estimated costs are then calculated automatically. Plus, as your project progresses and timesheets are submitted, you can track your project costs in real-time. This increased visibility allows you to identify any incorrect scopes of work and act quickly to protect your budget and profit margins.
Talk to the Nexvia team today at 1300 942 399 or Request a Demo to find out how we can help keep your construction projects on track.
