How to calculate labor cost in construction

Labor costs can become a headache for construction companies that don’t know how to calculate and track them effectively. Contractors have to manage wages, taxes, and benefits across multiple crews and jurisdictions. Add prevailing wage and union requirements to the mix, and it’s clear why labor is one of the most complex calculations companies have to make.

In this guide, learn how to calculate labor cost step by step using the standard labor cost formula. Explore how to track labor costs against budgets in real time to protect margins.

What is labor cost in construction?

In construction, labor cost measures the full expense of employing a worker on a job, including direct and indirect expenses. Direct costs connect to a specific project, like field crews’ hourly wages. Workers will make a different amount depending on how long they worked at each specific jobsite. On the other hand, indirect costs don’t tie to a specific job. For instance, salaried supervisors and admin staff will make the same each year regardless of which projects they’re working on.

Labor costs can be either fixed or variable. Fixed costs, such as a salaried project manager’s compensation package, stay the same no matter how much work gets done. Variable costs change with the workload, such as hourly wages and overtime pay for field crews. Clearly delineating between fixed and variable costs helps contractors predict how their spending might shift as project timelines evolve.

When everything is accounted for, labor costs are referred to as “fully burdened.” That means they reflect every last cost, no matter how indirect.

Why does calculating labor costs matter in construction?

Knowing how to calculate labor costs accurately changes how contractors bid, staff, and price every job. Here is what it makes possible:

• Protecting profit margins: Labor accounts for a large chunk of a contractor’s budget, which means accuracy has an outsized impact on their ability to price jobs effectively. With a strong understanding of labor cost calculation, contractors can create precise, competitive bids that don’t undercut profits.
• Making informed decisions: Clear labor costs give contractors firm, quantitative context to ground budgeting and forecasting decisions. This improves bid accuracy, reduces the risk of expensive budgeting mistakes, and makes it easier to predict how cost-saving measures like automation might affect profitability.
• Evaluating performance: Labor cost calculations give construction companies a precise way to measure productivity. Tracking labor costs at a granular level means contractors will quickly know if overtime spending is exceeding estimates or workers are spending significantly more time on a task than normal. Using this real-time data rather than average labor costs means contractors can make more precise scheduling changes that protect the bottom line.

How to calculate labor costs in construction: Step by step

Here’s how to calculate labor costs in four manageable steps.

1. Calculate gross pay.

Find hourly workers’ gross wages by multiplying their base hourly pay rate by how many hours they’ll work. For example, if an electrician who makes $30 an hour puts in 40 hours most weeks, their projected annual gross pay is:

$30 an hour × 40 hours a week × 52 workweeks in a year = $62,400 a year

Salaried employees make a fixed yearly amount, so the calculation is even more straightforward. If a salaried employee has a base salary of $75,000 a year, for example, their gross salary for the year is simply $75,000.

2. Add labor burden.

This is where contractors convert unburdened gross pay into fully burdened labor cost. First, list out all the expenses that don’t fit into gross pay. This might include:

• Payroll taxes, including Social Security and Medicare (FICA), federal unemployment tax (FUTA), and state unemployment tax (SUTA) contributions
• Employee benefit contributions, such as health, life, or disability insurance
• Retirement plan contributions, such as 401k matching
• Workers’ compensation insurance
• Employee training and certification

Sum these up and add them to the gross pay calculations for each worker. Say these costs come out to $15,000 a year for the electrician in the previous step. In that case, the total comes out to:

$62,400 a year gross pay + $15,000 labor burden = $77,400 a year

3. Determine actual hours worked.

Subtract paid time off (PTO) like sick days and vacation days (including paid holidays) from total annual hours to calculate the actual hours worked. Continuing with the electrician example, let’s imagine they’re budgeted for 2,080 paid hours annually (40 hours a week × 52 weeks in a year). 

If they also get 15 paid days off a year, that comes out to 120 hours of PTO (15 days × 8 hours). The calculation then becomes:

2,080 total paid hours − 120 hours PTO = 1,960 actual hours worked

4. Calculate the true hourly labor rate.

For the final calculation, divide the total burdened annual cost by actual hours worked. For the electrician, that comes out to:

$77,400 a year / 1,960 actual hours worked = $39.49 an hour

Additional formulas: Using labor cost to benchmark performance

Labor cost is valuable on its own, but there are several other metrics contractors can derive from it to shed light on profitability and performance.

Percentage of total revenue

This metric shows how much labor costs eat into total revenue. The formula looks like this:

(Total labor cost / total revenue) × 100

If a construction company’s total labor cost for the year is $500,000 and they bring in $1,500,000 in revenue, that comes out to:

($500,000 / $1,500,000) × 100 = 0.333 × 100 = 33.3%

That means the contractor spends just over 33 cents of every dollar they bring in on labor.

Percentage of total job cost

This metric shows labor cost as a percentage of the total cost of a specific job. It helps contractors track labor spend over time for each project. The formula is:

(Labor cost for the job / total cost of the job) × 100

For instance, if a job’s total cost comes out to $100,000, and labor costs totaled $35,000, the math looks like this.

($35,000 / $100,000) × 100 = 0.35 × 100 = 35%

For this particular job, labor accounted for 35% of the total outlay.

Track real-time labor costs for every job with Miter.

Calculating fully burdened labor costs accurately is one of the most sensitive areas of job costing because it touches so many moving parts. A single slip, such as a stray overtime hour or overlooked benefit, can lead to a blown budget that throws an entire project off track.

Contractors need a construction-first solution that connects time tracking, payroll, and job costing into a closed loop, with no manual exports in between. That’s what they get with Miter. 

In Miter, workers log hours by cost code tagged to each jobsite, payroll automatically applies the right pay rate and labor burden, and those fully burdened costs sync to the ERP after each payroll run. Contractors see actual labor cost by job the day payroll runs, no spreadsheet reconciliation required, with Miter.

Frequently asked questions

What is a good labor cost percentage in construction?

Labor typically runs 20 to 40 percent of total project cost in construction, though the number varies widely by trade and project type. What matters is tracking the trend over time. If labor cost percentage is steadily climbing, it lets contractors know their budgeting, scheduling, and pricing might need a second look, regardless of what wider industry benchmarks look like.

Does labor cost include equipment or material costs?

No, equipment and materials are separate cost categories from labor and are tracked under their own cost codes. Fully burdened labor covers wages plus the indirect costs of employing a worker, such as taxes, insurance, and benefits, but never equipment or materials.

How do you calculate labor productivity in construction?

Labor productivity measures how much work a crew gets done for each hour of labor. Contractors often calculate it using square footage completed, like this:

Labor productivity rate = Square footage completed / total labor hours

For example, if a flooring crew installs 1,000 square feet of flooring in 40 hours, their productivity rate is:

1,000 square feet / 40 hours = 25 square feet an hour