Ways to Understand Labor Costs In Your Estimates

Accurate estimating is a must in the construction industry. You need good estimates of the costs involved in any project on the table in order put in a realistic bid. This shouldn’t just appear low and appealing— but also accurate. Bid too close to your margins and you could end up struggling to make the job pay, as British firm, Carillion, recently found out to its detriment.

Carillion was one of largest building firms in the UK but ended up going into compulsory liquidation earlier this year. There were many factors contributing to its demise, but many commentators pointed to under-bidding as a major issue.

There are numerous elements that must be built into any thorough cost estimation. The costs of the materials and equipment needed to complete the job are obvious considerations, but labor factors are also crucial to any project and can be one of the most significant costs involved. Calculating the total labor hours involved is therefore a crucial step in providing an accurate estimate. It’s also, arguably, one of the most difficult parts of creating an accurate estimate.

Working out labor units

Smaller firms can ‘guesstimate’ the man hours for a particular job of limited scope and can generally achieve a reasonable level of accuracy based on experience alone. However, once you get beyond a certain level of scale and complexity, this method is no longer adequate, and other, more detailed techniques must be used.

The most common way of working out labor calculations is to use labor units. These set out how long it takes to install each and every component across the entire project, from laying out the foundations to building walls, installing sections of circuit on the MEP side, and the time taken to install each individual fixture and fitting. This requires a detailed quantitative take-off to be completed first, which will set out the requirements for each part of the job.

This can then be used in conjunction with labor rates for the different aspects of the job to produce a detailed labor cost estimate. Still, it’s not as simple as multiplying hours required by hourly rates. There are labor overheads and ‘non-productive’ hours to be taken into account, as well as numerous factors that can affect the costs, such as weather, illness, site conditions, and other means of productivity loss.

Factors to take into account

Once you have your basic figures, you will need to customize labor units based on the circumstances of the individual project.

When calculating how long it should take a worker to complete a particular part of the project – or more accurately a team of workers, with the figure expressed as hours – it is not generally advisable to consider only peak productivity rates. These are the rates at which the work would be accomplished with everyone going ‘full steam ahead’ and no external factors slowing them down.

In reality, there are various factors that can have an impact on productivity. Working long hours can have repercussions, as well as increasing costs as workers slip into overtime rates.

According to the NECA Manual of Labor Units, working 10-hour days for five days a week can result in a productivity loss of 15% to 20% after six weeks, while 12-hour days could result in a loss as high as 35% to 40%. Weather can have a huge impact and, while freak weather cannot be accurately accounted for, allowances based on location and time of year should be factored into any estimation. The temperature, conditions of the job and any special requirements, such as the presence of hazardous materials, should also be taken into account.

In addition to external factors that can affect productivity, you will need to build certain overheads into your labor costs. The costs for part-time contractors who are engaged for certain parts of the job can be relatively simple to work out on an hourly basis. But for full-time employees, you should use annual rates divided down to produce any hourly figures. The project employers might not be explicitly responsible for paying for workers’ holiday, for example, but you might be – and annual costs directly affect the hourly costs that you pay your contracted employees.

Hard labor rates should also include all employer taxes and benefits provided, such as healthcare schemes and insurance.

Using planned productivity rates

A more generalized approach was proposed in the journal Building and Environment. This uses the productivity rates of contractors’ planning engineers for a ‘typical’ building type. It uses these figures to produce a ‘Labor Estimate Factor,’ which is defined as the hour requirements per square meter of the building’s gross floor area. It then calculates costs based on national average wage rates for the type of work involved in different parts of the project.

But this method produces a far less accurate estimation. The report’s authors say it can be used from inception, when design information is at a premium, to provide a cost estimate that should fall within 20% of the final cost of the project.

Using Gantt charts

Gantt charts can be a good tool to utilize in labor cost estimating. These bar charts are actually used to visually represent a project schedule, typically showing the tasks that need to be performed sitting on the vertical axis while time intervals progress along the horizontal axis. This can be used to ensure that the job is staffed properly, meaning there is neither a lack of capacity nor productivity (from having too many skilled people sitting around doing nothing) at various parts of the project. In cost estimating terms, making sure you schedule your project management correctly can help you reduce your labor costs, allowing for a more competitive bid.

As mentioned at the start of this blog, estimating is not about coming up with the lowest possible costs and bid, but producing the most realistic and accurate one. That gives managers and bid writers the data they need to pursue contracts without putting themselves at risk of under-bidding and falling below acceptable margins in the process.