How to calculate and control construction labor costs

Labor costs typically account for a significant portion of a construction project’s budget, and any cost overruns in this area can quickly derail the project’s financial viability. Excessive labor costs can also make it difficult for your business to compete in a crowded marketplace and can lead to compromising worker safety and quality standards.

Effective construction cost management is essential to the success of any project, and controlling labor costs is a critical component. By staying on top of these costs, general contractors and project managers can ensure that they stay on budget and avoid costly delays. 

Discover what construction labor cost is and how to calculate it, and understand how to control costs to keep your business profitable and your standards high.

What is construction labor cost?

Construction labor cost is the amount of money that’s paid to workers who are involved in the construction process. This includes workers such as carpenters, project managers and people in administrative roles. The cost of construction labor can vary depending on factors such as the site location, the type of project and the level of expertise required from the workers.

Take a look at the different types of labor costs your construction business should consider.

Direct labor costs

These are costs that can be directly attributed to the production of goods and services. In construction, direct labor costs refer to the wages and benefits paid to workers who are directly involved in the construction process. These types of workers can include carpenters, electricians and plumbers.

Indirect labor costs

These costs are associated with workers who are not directly involved in the production process but support the construction project in other ways. These workers can include project managers, administrative personnel and safety inspectors.

Indirect labor costs can be more difficult to track since they’re spread across multiple departments. However it’s important to accurately account for these additional costs to understand the overall cost structure of a project.

Overtime costs

Overtime costs are the additional compensation paid to employees who work beyond their regular hours or outside their standard work schedule. In construction, these costs can be a significant expense, especially if the project timeline is tight or there are unexpected delays. But overtime work may be necessary to meet project deadlines. It’s important to carefully manage overtime costs to ensure you don’t exceed the budget.

Training costs

These costs are the expenses associated with providing education, instruction and training opportunities to employees to improve skills and knowledge. In the construction industry, training costs may include expenses related to safety training, equipment operation, project management and other specialized skills. While training can be a significant expense, it’s a worthwhile investment for construction companies.

Travel costs

Travel costs are the expenses needed for employee travel. These costs can include airfare, lodging, meals and rental cars. In construction, travel costs may be incurred when workers need to travel to a job site that’s located in a different city or state, or when they need to travel to attend meetings with clients, suppliers or stakeholders.

Subcontractor costs

These are the expenses included in the hiring of external contractors to perform specific tasks or portions of a project. Subcontractors are commonly used to complete the specialized tasks such as electrical work, HVAC installation and other trades. Subcontractor costs can include labor, materials, equipment rental and insurance. To manage these costs, construction companies will develop a bidding process to solicit proposals from multiple subs and choose the most competitive bid.

Union costs

These are the expenses that come with employing unionized workers. Labor unions negotiate collective bargaining agreements on behalf of workers and may require employers to pay certain costs, such as union dues and benefit contributions. To manage these costs, construction companies may negotiate with unions to secure the most favorable terms possible.

Why it’s critical to keep construction labor costs under control

Effectively controlling the cost of labor for construction can help your business in many ways, such as keeping your projects on time and on budget and allocating resources effectively. Labor cost management helps you identify potential risks and issues related to labor and develop plans to mitigate those risks. Take a look at why it’s critical to keep your labor costs under control.

Stay on budget

Effective labor cost management helps control costs and ensure that the project is completed within budget. Labor costs typically represent a significant portion of a construction project’s expenses, so it’s critical to successfully manage them. If labor costs exceed the budgeted amount for a specific task, they can impact the budget and leave less money for labor on other tasks. 

According to the latest APB annual report, 38.3% of builders are over budget on projects the majority of the time. Keeping labor costs in check can save your budget and improve overhead costs and profit margins in the long run.

Finish projects on time

Accurately estimating labor costs and managing labor resources can help to ensure that the project is completed on time. If labor costs are not effectively managed, it can lead to a shortage of workers or a lack of skilled workers. That, in turn, can cause errors and delays. The 2023 APB Report shows that 35.1% of projects are delivered after the agreed-upon completion date. Controlling the labor costs can ensure the job is completed within the estimated time.

Allocate resources effectively

Focusing on labor cost management helps to ensure that labor resources are allocated efficiently and effectively. If labor costs are higher than anticipated, it can impact the allocation of other resources, such as materials and equipment. This can result in delays in completing specific tasks, or the project manager may need to reduce the scope of the project or find additional funding to cover the increased costs.

Be more productive

By managing labor costs successfully, construction project managers can identify ways to improve productivity and efficiency on the job site. If those costs aren’t managed effectively, it can lead to a shortage of skilled workers. This can cause delays in completing certain tasks because workers may need to be reassigned or new workers may need to be hired and trained.

Additionally, if labor costs are not well managed, it can reduce productivity due to workers being overworked or fatigued. If labor costs are managed effectively, workers can be scheduled appropriately to ensure efficiency.

Stay in compliance

Controlling labor costs means ensuring compliance with labor laws and regulations, such as minimum wage laws and overtime pay requirements. Failure to comply with labor laws and regulations can result in legal and financial penalties, as well as damage to the reputation of the company.

One way that labor costs impact compliance is through worker classification. The classification of workers as employees or independent contractors is important. Misclassifying workers can result in violations of wage and hour laws and workers’ compensation regulations.

Labor costs can also impact compliance with safety regulations. If the costs aren’t managed correctly, it can lead to worker fatigue and result in accidents or injuries.

How to calculate labor cost in construction

Learn how to calculate a labor estimate for construction projects, and see a practical example of the calculation.

1. Break down the project into individual tasks

Take your full project and break it down into individual tasks. This will allow you to determine hours for each task on its own.

For example, let’s say that a project requires that we pour a concrete foundation and install electrical wiring.

2. Estimate the time required for each task

Now, you can calculate the construction labor cost per hour for each task based on the project schedule, the complexity of the task and the number of workers required to complete the task.

In our example, we’ll estimate the time for each of our tasks:

Pouring concrete foundation: A crew of six workers – 600 hours total

Installing electrical wiring: A crew of three electricians – 400 hours total

3. Determine the hourly wage rate for each worker

The construction labor rate is the amount paid to a worker for each hour worked. This rate can vary depending on the worker’s experience, skill level and job duties.

In our example, we’ll determine the hourly rate for each worker:

Pouring concrete foundation: $25 per hour for each worker

Installing electrical wiring: $35 per hour for each electrician

4. Multiply the time for each task by the hourly wage rate

Once the hourly rate and number of hours required for each task are determined, the labor cost for each task can be calculated by multiplying the hourly rate by the number of hours required.

Let’s use the numbers in our example:

Pouring concrete foundation: $25 per hour x 600 hours = $15,000 for the entire task

Installing electrical wiring: $35 per hour x 400 hours = $14,000 for the entire task

5. Add up the total labor cost for all tasks

Once the labor cost for each task is calculated, you can add up the labor costs for all tasks to get the total labor cost for the project.

Now, we will add the totals from our example:

$15,000 + $14,000 = $29,000 for total labor cost

Practical tips for controlling construction labor costs

Calculating labor costs can be complex and time-consuming, especially for larger projects with different types of labor. Here are some practical tips to make controlling your labor costs easier.

Plan and schedule tasks effectively

Scheduling is critical to controlling labor costs and delivering projects on time. To control costs, you can break down the schedule into smaller tasks so each task has a defined scope and timeline. This can help with identifying which tasks are critical to the project’s success and which tasks can be eliminated to reduce costs.

Use efficient building materials and methods

To lower labor costs, choose materials that are efficient to install and require minimal labor. For example, prefabricated materials can be assembled quickly and easily on-site, reducing installation time and labor costs. Prefabricated components reduce material costs as well.

Other efficient methods to consider include modular construction, off-site construction and integrated project delivery.

Invest in technology to reduce labor

There are many tools available that can help you streamline your project management processes, like Buildertrend. Technology allows workers to track their time and progress on the go. Buildertrend even offers a mobile app so each worker can document information from the field.

Software technology can also reduce the amount of time spent on office work. The tools on the platform will automate processes and reduce human errors that’ll be costly in the long run.

Monitor labor costs

To monitor labor costs, first set a baseline budget for labor costs at the beginning of a project. The baseline will serve as a reference point for tracking actual costs as the project progresses. Then, throughout the project, track the time and attendance of all workers using a time clock. Project management software like Buildertrend has time tracking and analysis capabilities to automate the process. When you have the actual costs and a budget, you’ll be able to identify cost overruns and savings, and you can address issues quickly.

Consider alternative labor options

There are several potential alternative labor options in construction, such as contract workers, part-time workers and subcontractors. Once you have identified the option you’ll go with, you can negotiate pricing and terms to ensure a fair deal. Remember to monitor the performance of the alternative options regularly to ensure they’re meeting your expectations and you’re able to make changes if needed.

Develop detailed project plans

One way to control labor costs is to create a comprehensive project plan that outlines all the tasks, timelines and resources required for the project. This plan should be based on a thorough analysis of the project scope, budget and schedule.

Monitor performance metrics

Regularly monitoring progress and performance against your project plan will help you identify potential delays or cost overruns early on. This will allow you to take corrective action before it’s too late. And by having this data to refer to, you can make positive changes for the future.

Optimize the recruitment and hiring process to get better hires

Hiring the right people can make a big difference, especially in the current market of labor shortages and inflation. With a good recruitment process, you’re able to hire people with the necessary skills and experience and reduce the risk of mistakes that require additional labor hours. Additionally, you’ll reduce turnover when you invest in the recruitment and hiring process from the start, eliminating increased training costs.

Take control of your labor costs with Buildertrend

Buildertrend is an integrated solution for controlling labor costs in construction projects. It offers a range of features that can improve construction job costing for your business.

With Buildertrend, companies have access to a powerful construction estimating tool that helps to automate the process and serves as a labor calculator for construction projects. The platform will assist with creating accurate estimates by factoring in labor costs, materials and other project expenses so you can get a realistic cost of a project. Construction cost codes can break down costs and help to identify areas where labor costs are high so you can develop plans to reduce them. 

Buildertrend can also integrate with construction accounting software, allowing for seamless tracking of labor costs and other project expenses. This can help to ensure that labor costs are accurately reflected in the project’s financial statements and that budgets are managed well.

The Buildertrend software also has a Time Clock feature for employees to record their time. For Tankersley Construction of Sacramento, California, a longtime Buildertrend customer, it all started with the Time Clock. Workers can clock in or clock out right from the Buildertrend app, and geofencing ensures employees can only do so from the job site.

“For our hourly employees, time tracking needs to be precise,” Steven Tankersley, president and owner of Tankersley Construction, said. “Through Buildertrend, that’s possible. Employees can even acknowledge if they were on breaks or at lunch. That amount of accuracy gives us the capability to do a better job costing and keep tighter margins.”

Ready to take advantage of Buildertrend’s integrated solution to control your labor costs? Connect with our team!

Construction labor cost FAQs

Get answers to the most common construction labor cost questions.