Over the years I’ve asked clients and colleagues how they estimate labor costs. The answer is usually the same: They define one number that represents hourly labor costs, including burden, and apply it throughout their estimates, no matter who does the work or what the tasks are.
Periodically, they compare estimated labor costs to actual labor costs, and adjust the estimated labor rate if necessary. Often, actual labor costs are lower, but remodelers use the higher rate to protect against under-estimated man-hours.
I call this “labor inequality,” and it creates a problem because, while you may not lose money, you never know what your true productivity rates are. Let’s look at an example of how this “inequality” plays out on a single job.
In the table below, the estimate columns use a uniform rate of $40 per hour for every labor task regardless of the type of work. Actual labor costs for the job (in the Cost columns) come in just $4 over budget (in the Difference columns). Everyone is happy because this is where most remodeling contractors stop their analysis.
Although this job is just $4 over budget, productivity is 13 man-hours above what was estimated. Only the inflated labor rate prevented greater losses. Analyzing labor rates and man-hours together makes for more accurate labor pricing and better estimates.
But if we dig a bit deeper, we discover that the job is 13 actual man-hours — that’s 32.5% — over budget, reducing the labor rate to $30.26 per hour, or 24% less than estimated. In these days of increased competition, it pays to tighten up your numbers.
What adjustments you make depend on how deep your data goes. If you can make this comparison on a full year’s worth of work or more, then you can use the reduced labor rate and the higher man-hour estimate. If you are looking at just one job, then keep the labor rate at $40 per hour, but estimate the hours 33% higher. If at the end of the job actual man-hours are on target and labor costs are still under budget, then you can experiment with lowering your estimated labor rate.
Eventually, you will achieve “labor equality,” which will make for better estimates by enabling you to truly analyze your job costs. Even if you keep labor rates high, you’ll know what the minimum is. Should you run into tight competition, you will know exactly how much you can lower your price.
Download the Labor Productivity spreadsheet
—Judith Miller is a Seattle-based construction business consultant and trainer specializing in accounting, finance, and computerization.
Not sure what burdened labor is? Check out the online labor burden calculator to help you calculate the cost of payroll taxes, workers' comp, and general liability insurance, and most of the other “indirect” costs associated with keeping an employee in the field full-time.
The example shown calculates labor burden at 76.6% above gross wages. Your burden may not be as high, but many remodelers fail to include all of their costs.
There are two ways to come up with the average burdened labor rate for estimates: Either average all your field employees together, or separate employees by position and use the average for the appropriate tasks. Typically, there are only three primary positions — supervisor, carpenter (including leads), and laborers.