# The Real Cost of Labor and How to Calculate Wage Rate

A generally accepted axiom in the construction industry is that of the three major cost categories of a construction estimate, the material, the labor, and the overhead, estimating labor represents the greatest risk to the contractor. This is often true because there can be many potential influences that are outside of a contractor’s control that can affect worker performance. Because of the added risk, the estimator should take additional care when preparing a labor cost estimate and seek to anticipate and evaluate any potential issues that may arise and develop contingencies for dealing with those potential issues.

On the surface, the formula and calculations for determining labor costs are quite simple, however, buried within that simplicity can be a myriad of other issues which can make the challenge significant. In its simplest terms, calculating labor cost is a matter of establishing two variables. The first is a basic unit or quantity that represents the particular material or process being estimated and determines the quantity of time that it will take for the material installation or construction process. This is known as the production rate. The second is allotting a financial cost to the material installation or construction process. This is known as the wage rate. The basic formula for estimating labor is to multiply the production rate by the wage rate.

$$Production\:Rate\:\times\:Wage\:Rate\:=\:Labor\:Cost$$

The remaining balance of this chapter will explore the numerous elements that must be taken into consideration when calculating labor cost beginning with the production rate.

## Production Rate

The steps to calculate your production rate are to 1) determine the basic unit of labor, 2) determine the crew, 3) determine the productivity factor, and then 4) calculate the work hours.

### Determine the Basic Unit of Labor

The first element in estimating the production rate is to determine a basic unit of labor. This is the measurement that will be used to quantify the process to be estimated. A wide variety of measurements could be possible, with some more appropriate than others for a given situation. For example, two possible methods of estimating concrete footings could be cubic yard or lineal footage. Either could be appropriate depending upon the circumstances. Footings for residential construction are often similar sizes such as 16 inches wide by 8 inches tall or 18 inches wide by 9 inches tall. These footings typically are formed using 2 × 8 or 2 × 10 material on each side and have two pieces of continuous horizontal rebar. Vertical rebar is also placed at standard distances (Figure 4-1).

In this case, it may be desirable to estimate the footing at lineal foot cost as material and labor would be similar for most installations.

Footing for commercial construction, such as those shown in Figure 4-2, can vary widely by size, material, and function. These footings have multiple variations in size and profiles with multiple arrangements of rebar, and it may be more appropriate to estimate these footings by cubic yard quantity.

### Determining the Crew

Several important factors should be taken into consideration when determining the crew that will perform a specific task. Considerations would include the specific set of skills needed to perform the operation, the optimum number of members in the crew, and the job description for each crew member.

#### Skills Needed to Perform the Operation

Specialized skill sets are needed to perform most construction operations, and optimal crew configuration would include individuals with the desired skill sets. Information, such as that contained in cost data manuals, can assist in determining crew configurations. NCE Figure 4-1 shows an example from the crew database in the National Construction Estimator with examples of job descriptions, number of crew members, and average crew cost per hour.

### Determining the Productivity Factor

Another element in determining the production rate is the crew productivity factor. The productivity rates of a crew can vary dramatically between crews and even within the same crew in different circumstances. Productivity of workers that is less than ideal will require an increase in the number of hours that the work requires, and a productivity factor greater than the norm will mean a decrease in the labor hours. Some of the variables that contribute to the productivity factor of crews include the availability of workers, climate conditions, working conditions, and other factors.

#### Availability of Workers

The construction industry is sensitive to economic factors and goes through cycles of high prosperity and times that are less so. These up and down cycles also have an effect on worker productivity. For example, in times of high economic prosperity, there tends to be shortages of workers in the industry as companies compete for high-skilled labor. During these times, high wages also draw more workers into the industry, however, these workers tend to have less training and fewer skills. As a result, they work slower, demonstrating lower levels of productivity. The opposite is true in times of less economic prosperity. Workers compete for fewer jobs, and those with less training and more marginal skills tend to drop out of the industry as unemployment rates rise. Typically, the workers left in the industry are those with higher levels of training and skills and tend to have higher productivity rates.

#### Climate Conditions

Construction work is often outside and can be subject to effects of the weather. Cold temperature, rain, and snow can have a big impact on many construction procedures and projects. For example, concrete setting is subject to temperature. The colder the temperature, the slower the hardening process. Ambient air temperatures below 40 degrees can significantly slow down or stop the hydration process. Concrete that is allowed to freeze before it reaches a strength of 500 psi will be irreparably damaged and will never achieve sufficient strength. Additional time and protection measures will need to be accounted for when placing concrete in cold conditions.

The opposite is also true of hot or windy conditions. Hot, dry, or windy conditions can evaporate the water from the concrete mix before it has time to complete the hydration process.

#### Working Conditions

Working conditions, such as number of workers on the job, working space, high rise construction, material on hand, and traveling to the job can also affect construction productivity.

##### Number of Workers on the Job

Too few or too many workers can have an adverse effect on construction productivity. Too few workers can lead to overtasked workers and a loss of productivity. Workers, at times, can put in long periods of work hours, but continued overwork will lead to a host of problems as workers are overworked. This includes not only a general loss of productivity, but also a loss of quality in their work. Overworked employees also have more injuries and other health care costs and take shortcuts that can lead to accidents or injury.

Too many workers on a job can have a negative effect that leads to many of the same problems. It can lead to inefficiencies as workers get in each other’s way, or the work of one individual conflicts with the work of others. This is often known in the industry as the crowding, or stacking, of trades. In addition, too many workers can lead to safety violations and injuries.

##### Working Space

Lack of sufficient working space where the worker is confined can lead to inefficiency.

##### High Rise Construction

High rise construction can also lead to worker inefficiency. Typically, there are limited means to access a building’s higher levels while under construction. High rise projects can have hundreds or thousands of workers on a job with limited access to the higher floors. In addition, there are time issues with getting material to the higher floors as material placement conflicts for the limited resources.

##### Materials on Hand

Delivery delays or disorganized project scheduling can lead to worker inefficiency as they wait on materials. The opposite can also be true. Material that is on the job site before it is needed can become an obstacle to work around.

##### Traveling to the Job

Projects at remote locations or that are far from the source of worker supply may also cause inefficiencies as workers need time to travel to the job site. The contractor often may be required to pay for travel time, either one way or both ways, as the workers travel to the job site. This factor will need to be included as labor costs are determined.

#### Other Factors

Other factors can contribute to worker inefficacy. Studies have shown that on average, workers accomplish only 30 to 50 minutes of work per hour. Factors that contribute to this include worker breaks such as coffee breaks, bathroom breaks, water breaks, or lunch breaks that start early or stop late. Other factors such as worker conversation, discussions about the “big game” or the “big date” last night can contribute to less than a full time period of work.

Daily startup and cleanup activities also contribute to worker inefficiencies, as workers get tools and materials on hand, get organized to start the day, and then get tools cleaned up and put away at the completion of their shift. Effective job organization can lead to a decrease in inefficiencies.

### Calculating the Total Work Hours

The formula for calculating total work hours should include a productivity factor as part of the equation. This basic formula would be

$$\frac{Quantity\:Takeoff\:\times\:Production\:Rate}{Productivity\:Factor}\:=\:Work\:Hours$$

NCE Figure 4-2 shows an example of the cost associated with board forming and stripping concrete footings. The Craft@hrs information shows that Crew B2 can form footings at a rate of 0.115 hours per SF. The introduction identifies the actual unit as square foot of contact area (SFCA), and it explains that when forms are required on both sides, the surface area of each side will need to be included.

Figure 4-6 shows an example of a typical 8x16 residential concrete footing. The forms are on both sides and are eight inches tall. The square foot of contact area for one side of the footing would be determined by converting the area of one lineal of footing form to a decimal form with the following calculation:

$$\frac{8\:in.}{12\:in.}\:\times\:1\:ft.\:=\:0.667\:SFCA$$

The quantity would be doubled to account for the forms on both sides and would result in the following quantity:

$$0.667\:\frac{SFCA}{Side}\:\times\:2\:Sides\:=\:1.334\:SFCA$$

Using an example of 100 lineal feet of footings, the total square feet of contact area would be

$$100\:LF\:\times\:1.334\frac{SFCA}{LF}\:=\:133.4\:SFCA$$

Crew B2 can install the footings at a rate of 0.115 hour per SFCA. The number of hours required to install the 100 lineal feet of footings would be

$$0.115\frac{Manhrs}{SFCA}\:\times\:133.4\:SFCA\:=\:15.34\:Manhrs$$

This would be the ideal number of man-hours needed to complete the project. If a productivity factor of 80% were included to account for a factor, the actual number of man-hours would be

$$\frac{15.34\:Manhrs}{.80}\:=\:19.18\:Manhrs$$

NCE Figure 4-1 shows that crew B2 has three crew members, one laborer, and two carpenters. This means that it would take crew B2 6.39 hours to complete the footing formwork as shown by the following calculation:

$$\frac{19.18\:Manhrs}{3\:Men}\:=\:6.39\:Hrs$$

Calculating production using these methods can be invaluable, however, the most accurate method of estimating labor is taken from historical data based upon crews’ past performance in a similar situation and should be a focus of the construction estimator’s efforts.

The second half of the equation in determining construction labor costs is to determine the employee wage rates. While cost data manuals can be helpful in establishing wage rates, much more accurate figures can be obtained when actual employee wage rates are known. This is more complex than simply applying an employee’s hourly pay rate to the equation. True employee wage costs are an aggregate of many factors, and each of those factors need to be taken into consideration when determining total employee wage costs. Another name for total employee wage cost is known as burdened labor costs.

## Burdened Labor Costs

Burdened labor costs are typically separated into three main cost categories. These categories are employee wages, fringe benefits, and employer wage taxes. The combination of fringe benefits together with employer wage taxes is often known as “labor burden,” and the term “burdened labor cost” is defined as the employee wages plus the labor burden. All three of the elements must be included together if true total employee cost is to be known.

Total burdened labor costs are all of the expenditures that an employer has as a result of using employees. This is much different than employee take-home pay, which is the amount that the employee has left over when all deductions and payroll taxes are subtracted from their gross pay. Figure 4-7 shows a graphical representation of this concept with the employee’s take-home pay on the left end of the scale and the total employer burdened labor costs on the right end of the scale, with the employee’s hourly pay rate between. In the example, the employee is paid at a rate of $10.00 per hour. His take-home pay might be around$7.00 or less an hour, and the total cost to his employer might be around $18.96 per hour. The$7.00 employee take-home pay amount is just an estimate because the actual amount would vary based upon a number of factors outside of the employer’s control. The three categories of cost, employee wages, fringe benefits, and employer payroll taxes are important for the construction estimator to understand.

### Employee Wages

The Fair Labor Standards Act (FLSA) requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and a half the regular rate of pay for all hours worked over 40 hours in a workweek. The FLSA provides an exemption from both the minimum wage and overtime requirements for employees employed as bona fide executive, administrative, professional, and outside sales employees. These are known as salaried or exempt employees.

#### Salaried Employees

There are specific requirements mandated by law for employees to be classified as a salaried or exempt employees. The United States Department of Labor sets the following standards for workers to be classified as exempt or salaried employees:

Employers frequently offer retirement benefits to their employees. Examples of retirement benefits include union pensions, traditional pension plans, profit sharing plans, and 401(k) plans. The cost of these benefits may be paid entirely by the employer, shared between the employer and employee, or paid entirely by the employee. Regardless of who pays the cost, these benefits are also exempt from payroll taxes. Figure 4-16 shows the calculated yearly cost to the employer who contributes matching funds to an employee’s 401(k) plan. The employee deposits 6% of his total taxable wages including regular wages, overtime wages, bonuses, allowances, and cash equivalents into a 401(k) retirement account. The example below is based upon a total taxable wage of $26,100 per year; the employee deposits 0.06 x$26,100.00 = $1,566.00 into their 401(k) account. The employer matches 75% of the employee’s contribution or 0.75 x$1,566.00 = $1,174.50 into the employee’s 401(k) account. #### Total Non-Taxable Fringe Benefits Both the employer and the employee in Figures 4-15 and 4-16 made payments to the employee’s health insurance and 401(k) retirement account. Their total non-taxable contributions are the sum of their yearly insurance premiums and retirement account deposits. This is shown in Figure 4-17. ### Payroll Taxes A wide range of federal and state withholdings and taxes are assessed based upon payroll amounts. These payroll taxes can be charged to the employee, employer, or to both. Payroll taxes can contribute significantly to employment costs and need to be carefully determined based upon the specific situation. Payroll taxes include social security taxes, Medicare taxes, state and federal unemployment taxes, worker compensation insurance, and liability insurance. #### Social Security and Medicare Taxes The Federal Insurance Contributions Act (FICA) needs each employee to pay social security and Medicare taxes. The amount that is required for social security is 12.4% of an employee’s wages, and the amount for Medicare taxes is 2.90% of wages. This totals a combined FICA contribution of 15.3%. This percentage has remained stable for many years. The federal government also establishes an earnings limit by which FICA contributions no longer have to be made. The limit usually goes up each year and is based upon average national wages. In 2018, the FICA earnings limit was$128,700.00. The law requires that the employees pay half or 7.65% of the FICA contribution and that an employer pay the other 7.65%. Self-employed individuals, such as independent contractors, must make contributions to social security and Medicare taxes through the Self-Employed Contributions Act of 1954. In the case of self-employed individuals, however, they are required to make the entire 15.3% contribution.

When determining labor cost, an estimator will only need to account for the 7.65% half of the employer FICA contributions. FICA tax is calculated in the following manner:

If an employee earns more in a year than the $128,700 earnings limit, their FICA contribution is equal to the maximum contribution, which is $$\frac{\128,700.00}{Yr.}\:\times\:7.65%\:=\:\frac{\9,845.55}{Yr.}$$ If an employee earns less in a year than the contribution limit of$128,700, the entire amount of their wages is subject to social security contributions. This earning limit does include all total taxable wages including regular wages, overtime wages, bonuses, allowances, and cash equivalents. The exception to this are contributions made by the employee for non-taxable fringe benefits such as insurance and retirement. Figure 4-18 shows an example of the FICA contributions that are due from an employee who has total taxable wages of $26,100.00 per year and has made the previously discussed$5,700.00 health insurance payments and 401(K) retirement withholdings.

#### Liability Insurance

Liability insurance protects the company and employees from claims such as bodily injury, property damage, or loss that may arise as a result of failure to use reasonable care in conducting business operations. The premiums for general liability insurance vary by state and the contractor’s record of claims. The premiums for general liability are based upon payroll cost for each class of trade employed. For example, the premium payments for a concrete finisher may be 5% of the payroll, and a carpenter may be 3.9% of the payroll. The liability insurance premium for the employee in Figure 4-12 is based upon their total compensation of $26,100.00 and a 3.9% premium rate. This results in a yearly liability insurance premium payment of$1,017.90 for that employee. This is shown in Figure 4-21.

## Total Burdened Labor Cost

The total annual labor cost is determined by summing the wages paid to the employee and adding the cost of the individual burden items. Figure 4-22 shows the total annual labor cost for the employee in Figure 4-12.

The average hourly wage for this employee is calculated by dividing the total yearly employer cost by the number of billable hours. It was determined in Figure 4-6 that the employee had accrued 2,040 billable hours. Figure 4-15 shows the calculations for determining the average hour wage rate for this employee.

The labor burden markup percentage is calculated by dividing the total net annual payroll by the annual cost of the billable wages. The employee in Figure 4-3 had a total net annual payroll of $39,368.81 and a total employee compensation, including bonuses, allowances, and cash equivalents of$26,100.00. The money that is paid for holidays, sick leave, and vacations needs to be subtracted from the total employee compensation and the total yearly compensation needs to be divided by that amount. This is shown in Figure 4-24.

## Determining the Weighted Average Wage Rate

The weighted average wage rate is the average of the total burdened labor cost for each employee in the crew. This is calculated by adding up the burdened labor cost for each crew member and dividing by the number of members in the crew. Figure 4-25 shows an example of this calculation for a crew of three.

## Calculating Total Burdened Labor Costs

The first section of this chapter explained that the formula for calculating the total labor costs is Production Rate x Wage Rate = Labor Cost.

The production rate for 100 lineal feet of footings was previously calculated by multiplying the length of the footings by the square footage of contact area for each lineal foot of footing. Next, the production rate of 0.115 hours per square foot of contact area is multiplied by the total square footage of contact area to determine the number of man-hours needed to form the footing. Finally, the total hours are divided by the productivity of 0.80 for a total calculation of 19.18 hours (Figure 4-26).

The total burdened labor cost is determined by multiplying the production rate by the weighted average wage rate.

$$\frac{\22.21}{Manhr.}\:\times\:19.18\:Manhrs\:=\:\425.99$$

## CITATIONS

Fact Sheet #17G: Salary Basis Requirement and the Part 541 ... (2018, January). Retrieved from https://www.dol.gov/whd/ overtime/fs17g_salary.pdf

Morello, R. (2017, November 21). Overworked Employees & the Quality of Work. Retrieved from https://work.chron.com/ overworked-employees-quality-work-22958

Publication 15-B (2017), Employer’s Tax Guide to Fringe Benefits. (2017, September 11). Retrieved from https://www.irs.gov/ publications/p15b

Smith, C. R. (2007, December). Providing Fringe Benefits in the Prevailing Wage World. Retrieved from https://books.byui.edu/-QnCv