Properly managing a project’s finances can be the difference between success and failure. A Global Construction Survey conducted by KPMG found that only 31% of projects end up being within 10% of their original budget.
A large part of expense management involves tracking and calculating direct labor costs. The number of workers involved in a single project can make this a daunting task, but knowing how to do so can allow you to manage your project’s finances more effectively.
Here’s how we define the cost of direct labor in construction, how to calculate it, and how the SmartBarrel device can improve your labor management process.
What are direct labor costs?
Direct labor costs are expenses incurred as a result of work performed for a project. This includes worker wages and salaries. Work needs to be attributed to tasks done by a specific employee on site—work expenses that aren’t connected directly to production are considered indirect labor costs (i.e., overhead).
Direct labor costs are important to include in total expense tracking since they usually constitute a large portion of the project’s expenses.
Why is calculating direct labor in construction important?
To make the right budgeting and financing decisions, you’ll first need to know what costs the project is already incurring. Direct and indirect costs can inform plans going forward, giving you more visibility into operating expenses. From there, you can make a decision on whether it’s better to opt for more competitive pricing to save, or shift the budget to invest in quality work.
How to calculate direct labor costs
Direct labor usually takes into the account the following:
- Regular working hours
- Overtime
- Payroll taxes
- Additional expenses such as employment insurance, health insurance, benefits, and pension plan contributions
- Employee training and professional development costs, if applicable during the course of employment
In other words, direct costs are made up of every expense that a company spends to hire and keep employees.
A standard labor cost per hour rate is usually established to estimate direct labor expenses. There are certain direct labor cost formulas you can use to make calculating expenses easier. Here are some of the most common ones.
Direct labor hourly rate
Direct labor hourly rate takes into account hourly pay rate, benefits, and employee taxes. It calculates the cost per hour of keeping an employee on the job.
To calculate direct labor hourly rate, use this formula:
(Value of benefits + payroll taxes) / Number of hours worked in a payroll period + Rate per hour = Direct labor hourly rate
For example, if an employee earns $15 an hour and works 40 hours per week, receiving $150 in benefits with $60 paid by the company in taxes, you’d plug in the numbers accordingly:
(150 + 60) / 40 + 15 = $20.25 direct labor hourly rate
Labor cost per unit
Labor cost per unit shows how much you’re spending on labor per task.
To calculate labor cost per unit, use this formula, including the direct labor hourly rate calculation previously shown:
Direct labor hourly rate x Time required to complete one task = Labor cost per unit
For example, if the direct labor hourly rate is $20.25 and it takes 0.5 hours (i.e., 30 minutes) to finish a task, you’d plug in the numbers accordingly:
20.25 x 0.5 = $10.13 labor cost per unit
Direct labor hours
Direct labor hours let you know how long it takes on average to complete a task. While it’s more indirectly related to expenses, it can be helpful for budgeting and scheduling purposes.
To calculate direct labor hours, use this formula:
Total number of finished tasks / Total number of direct labor hours needed for completion = Direct labor hours
For example, if it takes 10 hours to finish 15 tasks, you’d plug in the numbers accordingly:
10 / 15 = 0.67 direct labor hours
In other words, it takes 0.67 hours (i.e., 40 minutes) to complete 1 task.
To convert decimal hours to minutes, you can use a simple time unit converter.
Comparing construction labor costs
Once you’ve calculated labor costs for your project, it’s important to compare your direct labor cost per unit to what’s standard in the industry.
Having a direct labor cost per unit that’s too high can be unsustainable and create problems in the future if you end up running out of funds.
While a low direct labor cost per unit is desirable, it’s also important to consider whether you’re receiving quality work for the amount you’re paying. In some cases, allocating more funds for labor can end up being better in the long run.
How to calculate direct labor costs more easily
While manually calculating costs for direct labor can be useful, with so many costs associated with construction projects, it can end up being a laborious task. Plus, it’s less than ideal since it creates room for human error.
The best solution is to invest in accounting and timekeeping software to automate the process, so you’ll no longer need to spend hours calculating every labor cost.
SmartBarrel is your solution to managing labor and its expenses
Labor management doesn’t have to be complicated. The SmartBarrel device is a labor management solution built to make your job easier.
Our sturdy, easy-to-use plug-and-play box is magnetic, solar-powered, LTE-connected, and weatherproof. Suited for job sites of all sizes, set-up is simple, with little to no maintenance required from IT.
Workers check in and out through a biometric facial verification scan for accurate timekeeping. This also eliminates the possibility of buddy punching.
Construction accounting and payroll professionals benefit from:
- Quick and simple worker profile addition for onboarding and removal
- Receiving approved timecards to eliminate chasing workers for information
- Exported data that can be automated and sent to payroll
The SmartBarrel device also syncs seamlessly with existing accounting solutions and integrates with CMIC, FoundationSoft, Viewpoint, Autodesk, and Procore to streamline your operations.
Need help managing labor on your job site? Book a demo with SmartBarrel today!
