Mastering Labor Costs: How to Calculate Precisely in Construction

The construction industry is cost-forward. You have to spend the money upfront for a project and recoup after your final invoice is paid. That’s why correctly estimating the total costs of your project is crucial to profitability.

One area almost every business fails to calculate properly is their labor costs. In the construction industry, 20-40% of the total project budget will typically go toward labor costs. But contractors routinely underestimate the full burden of their employees’ labor rate, and it eats into their profits.

It’s crucial to understand how to accurately account for all of the costs associated with an employee above and beyond their hourly rate to make accurate estimates. In this blog, we’ll walk you through all the costs associated with an employee. Plus, we’ll teach you how to calculate an accurate rate for estimating a project and building your budget so you don’t leave money on the table.

Types of Labor Costs

As a contractor, there’s more to your labor burden than just employees’ hourly wage. Let’s take a closer look at four of the most commonly overlooked costs in construction labor budgets.

Overtime

The first thing you’ll look at when calculating your labor costs is an employee’s base rate. Odds are you multiplied that by 40 hours, added the sum to your budget and called it a day. But what happens when a job runs longer than expected? Or that employee pitches in to cover someone else’s work?

Overtime can throw a wrench in your budget if you haven’t planned for the extra costs. Depending on your state, you’ll owe employees who work overtime time-and-a-half or even double pay when they surpass a 40-hour workweek.

If you have employees who frequently work overtime, it’s important to add those extra costs into your labor budget so they don’t have to come from your profits.

Taxes

Another daunting reality of labor costs is payroll taxes. There are two important types of taxes you’ll need to keep track of for each employee:

• FICA (Federal Insurance Contributions Act) – The total rate for FICA is 15.3%, split equally between the employer and employee. You’ll withhold 7.65% of the employee’s paycheck and contribute the other 7.65% yourself. This includes 1.45% for Medicare and 6.2% for Social Security.
• Unemployment Taxes – FUTA (Federal Unemployment Tax Act) requires you to take 6% of an employee’s base rate up to the first $7,000 of wages. SUTA (State Unemployment Tax Act) in each state with varying rates and taxable wage limits.

As you calculate these rates for each employee, you can add the figures to their base pay to calculate their total cost of wages. Below is an example of calculating the total labor cost of a Journeyman Carpenter in Texas. In that state, the FUTA rate is 6.2% with a 5.4% credit. The SUTA rate is 5.4%.

Many states and localities have additional taxes employers are required to withhold. Consult with your locality or state for all applicable taxes and rates.

Employee Insurance Package

Insurance benefits provided by your company such as health insurance, dental insurance, and vision insurance would be considered part of this package. To calculate these costs, you’ll need to subtract what the employee is paying from the total cost of the insurance.

You can do this either as a percentage or an amount per hour. Below you’ll see how you calculate the amounts for both approaches.

Company Insurance Package

You also have to consider the insurance that protects your construction company. Things like general liability and worker’s compensation insurance are part of the company’s insurance package. It’s important to consider these two elements, and others like them, when cost estimating and budgeting for a project.

Most company insurance is based on either your revenue or how much you spend on payroll. General liability insurance is calculated against your revenue, but the rates can vary widely depending on your business type and location.

Worker’s compensation rates are calculated based on your payroll expenses. Again, the rates can vary based on your trade and what state you operate in. Both types of insurance are calculated incrementally. General liability insurance is per $1,000 of revenue and worker’s compensation is per $1,000 of wages.

To calculate general liability correctly, you’ll have to estimate your revenue per employee for the year then calculate the rate to apply to their base pay.

Additional Considerations

Any additional benefits you offer your employees will also need to be factored into your labor costs. Some include:

• Retirement contributions
• Disability insurance

Paid holidays

• Vacation time
• PTO
• Union benefits
• Life insurance
• FSA or HSA

You also have to think about your operation costs — items that you have to use or maintain to complete projects. For example, if you have a fleet of vehicles or a company bulldozer, you’ll have to factor the maintenance costs into your labor budget.

In the example below, an employer offers a 3% match on 401(k) gross wages, uses a fleet of trucks that cost $20,000/year per employee, uses hand tools that cost $6,000/year per employee, and is provided 8 days of PTO each year. This is how the numbers would break down per hour.

The 401(k) contribution is simply 3% of the gross base rate. For the truck and hand tools, you would divide the total cost by the annual hours (2,080).

Paid time off is a little trickier. You have to calculate 8 days of 8 hours’ pay, then divide that by the annual earnings. So in this example it would be:

• $25 x 8 hours = $200
• $200 x 8 days = $1,600
• $1,600 ÷ 2080 = $0.77

Remember, this is per hour. To help you get a better understanding of what it would cost per paycheck, we’ve calculated the contributions for a 40-hour workweek below:

Final Labor Construction Costs

Once you calculate all of the varied taxes, benefits, insurance, and other costs associated with your construction workers, you can find the total labor cost for each employee. Below we’ve added up all the costs for Journeyman Electrician per hour:

That total cost shows that you need to charge at least $48.11 per hour to cover the cost of having this person working on one of your job sites.

It’s More than Just Base Rate

The most important aspect of correctly calculating your labor costs is to remember that there is more than just a base rate involved. In our example, the burdened percentage of labor was 92%. That means the cost of the employee was almost double their base rate.

So to avoid losing profits to labor costs:

• Do your homework so you know what taxes you’re responsible for paying and what the rates are in your area.
• Calculate your labor burden for each employee ahead of time.
• Build those costs into your estimate so you know you’ll make the profit you need to succeed.

We know budgeting your labor costs and tracking expenses can be time consuming. That’s why Crewcost has capabilities to streamline your data and make calculating labor easy. Schedule your demo today to see how Crewcost can help your construction business stay profitable.