When you finally set out to find your true labor costs, you will have revelations that answer a lot of nagging questions from, “Why do I consistently win bids that aren’t profitable?” to “How come I can’t afford shoes for my kids?”
True labor costs elude construction businesses on a grand scale. That’s because construction owners aren’t accountants. Jack Ganley is, however, and what he writes here about construction’s true labor costs sheds light on some dark corners of construction businesses.
Every Little Expense
Your construction business has two categories of labor costs: direct and indirect. Direct costs apply directly to the project contract, while indirect costs include benefits, taxes, and other labor costs not directly contributing to the contract. As you might guess, there are many indirect labor costs.
Besides the obvious taxes, there is workers’ compensation, and unemployment. There is also vacation time, paid time off, and sick days, plus benefits like health insurance, bonus, personal protective equipment, fuel reimbursements, hand tools allowance, general liability, auto insurance, training, uniforms, office costs, and more.
You can’t just copy the indirect costs of some other construction business, because each business is different. When you finish accounting for all these labor costs and adding them to the base wage you pay, you’ll have a starting point of how much to charge for the labor your company provides. Before you think you’re done, though, there’s also a productivity factor that you should consider.
Even though you might figure that the standard work week of 40 hours over 52 weeks totals 2,080 hours, that’s not an accurate representation of how many hours each employee is available to work in a given year. You have to deduct their vacation days, holidays, sick days, training hours/days, and the time each person spends taking care of administrative tasks like tracking time and planning the work.
All of those things added up can easily reduce the productive hours for each employee by 200 or more hours each year.
Taking these factors into consideration, the picture of how much each employee actually costs gets more accurate. In fact, it’s not uncommon for the costs of labor to come in at 70% or more of employees’ base pay.
Hurry Up, Wait and Wait Some More
There’s another factor to consider in relation to productivity. Numerous sources report that construction workers spend up to 29% of their productive time waiting for materials, equipment and the right conditions.
As J.F. McCarthy writes in his book Choosing Project Success, workers are also losing a chunk of their total time available traveling (13 percent), receiving instructions (8 percent), mobilizing (7 percent), starting late and quitting early (6 percent), and taking breaks (5 percent). Adding in the 29 percent mentioned above, this means about 70% of a construction worker’s available time doesn’t contribute directly to completing a project.
And, lest management thinks themselves superior, McCarthy points out it’s not uncommon for those in managerial roles to be unproductive 90% of their working hours due to inefficiencies in managing documents, time, and communications.
Clearly, most contractors have plenty of opportunities to improve inefficiencies and productivity. The best place to start is with the dollars because they are easy to see, understand, and manipulate. Once you’ve calculated your true labor costs and applied those figures your contracts, the next place to look is at the project level, reducing unproductive time wherever possible with new methods and technologies.