Comprehensive Guide to Calculating True Labor Costs in Construction

In the construction industry, you have to spend money to make money. Because our industry is so cost-forward, contractors have to pay upfront for construction projects and recoup after the final invoice is paid. If you don’t accurately estimate the total costs of your project, you’ll put your profitability on the line. 

One cost almost every construction business fails to calculate properly is labor. Typically, around 20-40% of a total project’s budget will go toward labor costs, but many contractors consistently underestimate the full burden of their employees’ labor rate. 

In this guide, we’ll explain how to account for all of the costs associated with employees (above and beyond their hourly rate). We’ll also 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.

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Key Takeaways

• Your construction labor costs are much more than your employees’ base rate. To accurately estimate and budget for jobs, you’ll need to take taxes, benefits, and more into account.
• Along with state and federal taxes, some states and districts have additional taxes employers are required to withhold, so double check when calculating labor costs.
• Whenever you can, calculate your labor costs ahead of time, so you can accurately build them into project estimates. 

4 Types of Labor Costs That Aren’t Hourly Wages

There’s much more to your cost of labor than just your employees’ hourly wage. Here are 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 when that employee pitches in to cover someone else’s work?

If you haven’t planned for the additional cost, overtime can throw a big wrench in your budget. Depending on your state, you’ll owe employees who work overtime time-and-a-half or even double pay when they work over 40 hours.

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 reality of labor costs is payroll taxes. There are two important types 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) has varying rates and taxable wage limits in each state.

When you calculate these rates for each employee, you can add the figures to their base pay to calculate their total cost of wages. 

Here’s an example of how to calculate 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%.

Head’s up: Many states and districts have additional taxes employers are required to withhold. Consult with your district or state for all applicable taxes and rates.

Employee Insurance Package

Any insurance benefits provided by your company (health insurance, dental insurance, vision insurance, etc.) are 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’ll also need to consider the insurance that protects your construction company. General liability insurance, workers’ comp, and any other policies have to be factored in when estimating and budgeting for a project. 

Most company insurance is based on 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.

Other Things to Consider in Your Labor Cost Calculations

If you offer additional benefits to your team, they’ll also need to be factored into your labor costs. Some common examples 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 those maintenance costs into your labor budget.

In this example, let’s say 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 provides 8 days of PTO each year. This is how the numbers would break down per hour:

The 401(k) contribution is just 3% of the gross base rate. For the truck and hand tools, you 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 Costs for Each Employee

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

This means you need to charge at least $48.11 per hour to cover the cost of this person.

🚧 Remember: It's more than just a base rate. 

The most important thing to remember when figuring out your labor costs is that there’s much more than your employees’ base rate involved. 

In our example, that company’s burdened percentage of labor was 92%. That means the cost of the Journeyman Electrician was almost double their base rate.

So how do you protect your bottom line from labor cost miscalculations?

How to Avoid Losing Profit on Labor

Construction is famously a low-margin industry, so anything you can do to protect your bottom line is a plus in our book. When it comes to managing labor costs specifically, here are a few things you can do to stay proactive and keep your margins high:

• Know what your overhead costs are (preferably as a percentage), so you can build more accurate job costs. Remember - your labor burden is never just the base rate!
• 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.
• Make sure you’re tracking labor costs within your accounting system. If you try to keep it all on pen and paper, things will inevitably fall through the cracks (not to mention how time-consuming it can be).

Of course, labor costs are just one piece of all the components of your construction accounting system. If you want to learn more about building out a comprehensive, accurate process for construction accounting, check out our Ultimate Guide to Construction Accounting for Contractors. We dive into all the things that make construction accounting complex, and how you can build a more profitable and stable construction business.

Budgeting your labor costs and tracking expenses doesn’t have to be a headache. Try CrewCost and see what accounting software built by contractors, for contractors can do for your business today.