There are more than 3.7 million construction companies in the United States and they all create estimates, all of which are different. Construction project estimates come in a variety of styles and formats, from word documents with written descriptions and lump sums to detailed breakdowns that appear to have a bounty of data but contain very little substance. What’s not different? They all contain costs that are generally accepted to fall into five categories: labor, material, equipment, subcontractor costs and other costs. In the post, we focus on labor, as it makes up the largest cost category of most construction projects and is the hardest to analyze.
To begin, let’s explore the other four categories:
- Material is straightforward, e.g., if you have an area that needs 250 square feet of paint and a gallon covers 300 square feet, then you need one gallon of paint. If you have a floor with 100 square feet, you need 100 square feet of flooring (plus waste). There may be some disagreement about waste factors and coverage, but it’s not going to make a huge difference in cost.
- Equipment is usually estimated for the project based on time periods, i.e., days, weeks, months, etc. These time periods typically fall in line with the labor it takes to perform the work.
- Subcontractor costs are typically submitted in the form of an estimate or bid.
- Other costs are those items that are not included in the previous four, they include items such as temporary facilities (trailers, toilets, wash stations, power, etc.), job site fencing, shipping and logistic cost, etc.
Unlike these categories, labor is a cost item based on, or should be based on historical references, trade knowledge, production understanding and good judgment. Labor is calculated by productivity, using either units per hour, or hours per unit. These labor productivity calculations can be compared to industry averages, and deviations from these averages justified based on project conditions. In the best-case scenario, labor crews, hours, rates and productivity are detailed in an estimate.
Calculating Labor Costs for Ill Defined Scope Items
All of the five categories of costs are based on quantities, which tells us how much of something is being installed or performed. Examples are square feet of drywall or cubic yards of concrete. What we see too often though are non-standard quantities such as “location” or “lump sum” for items that have a defined unit of measure (i.e., square foot, lineal foot, etc.). Typically, costs are then applied to these non-standard quantities similar to the following “remove and replace drywall, 3 locations, and 24 hours.” From here figuring out the measurements and verifying them is crucial as we can then reverse engineer the labor productivity and compare it to industry averages. We find by determining the actual quantity and analyzing the resulting labor productivity that the amount of labor is more often than not over or understated.
A change in material, equipment and other costs may affect an estimate, but none of these have the impact labor does. If labor productivity is 20% higher than what was expected, this not only increases labor cost, but general conditions, equipment, and other costs as well. Ultimately, labor is the most critical cost component to analyze as it can tell a story that most other costs cannot.