Calculating the Construction Labor Budget in Your Estimates

But many construction companies ignore calculating the specific labor budget for a given job. If you do not clearly communicate the labor budget to your employees, then your employees are left without specific production goals.

Profitability suffers without production goals.

I am sure you have heard the expression “elephant in the room.” This expression means “a big issue everyone is aware of, but which is being ignored, because everybody finds discussion about it uncomfortable.”

The rationale behind this idiom is that an elephant in a room would be impossible to overlook, but people in the room can nevertheless choose to behave as if the elephant was nonexistent.

In this post on the FineHomebuilding blog, I describe how to develop your construction labor budget and communicate it to your crew.

START WITH THE BASE RATE LABOR BUDGET

In this post, I describe how to develop the base labor rate for your crews and how that works in your proposals.  Every construction proposal should communicate at least two items to the potential client:

1. Price
2. Scope of Work

Likewise, every construction proposal should communicate at least two items to your production crew:

1. Scope of Work
2. Labor Budget (in MAN-HOURS)

When estimating the scope of work for a project, you assign each item in the scope of work a length of time to complete that task.

For example:

You need to install and case 10 interior doors.

You have determined a production rate of 3.5 hours per door to install and case both sides.

You can now determine the LABOR BUDGET to install the 10 doors.

Multiply the number of units (10 doors) by the production rate (3.5 hr/door):

LABOR BUDGET = # of UNITS X PRODUCTION RATE (HR/UNIT)

LABOR BUDGET = 10 doors X 3.5 HR/DOOR = 35 HOURS

Now we can determine the price for this scope item by multiplying the LABOR BUDGET by the BASE RATE.

In a previous post (Developing A Base Rate), the calculated BASE RATE for a 3-person crew was $150/HR or $50/HR/MAN.

I will use the $50/HR/MAN as the BASE RATE for this example.

The price for this scope item is:

LABOR BUDGET X BASE RATE = 35 HRS X $50/HR = $1750.

DON’T IGNORE THE ELEPHANT IN THE ROOM

The production rate used in this example assumes we live in a perfect world where all we have to do is show up and install and case a door. The production rate does not account for all the setup, breakdown, site conditions, and other difficulties that we will encounter when installing these doors.

We need to account for these items in our price and our labor budget. We can do this by applying production factors to this scope item.

DEVELOPING PRODUCTION FACTORS FOR YOUR CONSTRUCTION LABOR BUDGET

Let’s assume that you spend 15 minutes each day setting up the job site and 15 minutes cleaning up at the end of the day. You need to account for this in your price and LABOR BUDGET. This is 6% of an 8-HR day.

30 minutes / (8 HRS x 60 MIN/HR) X 100% = 6%

Let’s also assume that you spend 10 minutes each day dealing with site conditions. This could be parking your vehicle far away due to limited space at the job site, scattering the doors throughout the project, or dealing with limited power in your work area. You need to account for this in your price and LABOR BUDGET. This is 2% of an 8-HR day.

10 minutes / (8 HRS x 60 MIN/HR) X 100% = 2%

You might have to deal with certain difficulties associated with the task itself. These doors could be 8 ft solid wood doors that are take extra time to install. Maybe the doors are pre-finished and need to be handled with extra care. You need to account for this in your price and LABOR BUDGET. This could easily be 10% of an 8-HR day (48 minutes).

10% X 8 HRS x 60 MIN/HR = 48 MINS

Accounting for these production factors in your price and LABOR BUDGET is a simple calculation.

Using the percentages developed above, we need to add an additional 18% to our price.

6% SETUP/BREAKDOWN + 2% SITE CONDITIONS + 10% CUSTOM WORK = 18% TOTAL PRODUCTION FACTORS

ADJUSTING THE PRICE AND LABOR BUDGET WITH PRODUCTION FACTORS

In the Interior Door Example above, we calculated a BASE PRICE of $1750 for the installation and casing of 10 doors. The LABOR BUDGET for this price is 35 MAN-HRS.

We can adjust the price to account for the production factors listed above by increase the price by 18%.

ADJUSTED PRICE = $1750 X 1.18 = $2065

With the price adjustment for the production factors, we can calculate the ACTUAL LABOR BUDGET for this work using the BASE RATE of $50/HR.

ACTUAL LABOR BUDGET = ADJUSTED PRICE / BASE RATE = $2065 / $50/HR = 41.3 HRS

The difference in the original LABOR BUDGET (35 HRS) and the ACTUAL LABOR BUDGET (41.3 HRS) is the reason many construction business owners get frustrated when their crews don’t seem to produce work at the desired rate.

Think of it this way.

When you estimate materials, you know that you have to account for waste. Many times this could be as high as 20%.

The same theory applies to the labor as well. There is going to be some “waste.” But this additional time is not tossed in the dumpster. This additional time is used to perform the job.

You have to account for it in your proposals and communicate the LABOR BUDGET to your employees so they know what is expected and how you priced the job.

You use a labor number to determine the price for your jobs. Make sure you account for the factors that slow or limit your production. When you account for these factors, produce a LABOR BUDGET to go along with the scope of work. Communicate this LABOR BUDGET to your employees and help them achieve it by proper planning and execution.

DON’T IGNORE THIS ELEPHANT

If you have produced a proposal with a scope and a price, there’s a LABOR BUDGET in there. Accurately estimating, pricing, communicating, and managing the LABOR BUDGET is vital to the success of your construction business. Don’t ignore this elephant in the room. Communicate it your people.  Otherwise, it will run you over.