Calculating Labor and Material Costs in Construction
If you are in the construction business, you know that there is a never-ending list of details to keep track of.
Labor and material costs can be two of the biggest stressors, but they don’t have to be.
In this guide, we will cover how to calculate labor and material costs and why they are essential for accurate budgeting.
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What Does “Labor and Materials” Mean?
“Labor and materials,” also known as time and materials, is a phrase in a construction contract in which an employer agrees to pay the contractor based on the amount of time spent by the contractor’s employees to perform the work and for the materials used in the project.
Labor Cost vs. Material Cost Mean?
The ability to grasp the difference between material cost and labor cost is an essential key to both budgeting well and making a profit.
While labor and material costs are two very different entities, they share several similarities.
Both labor and material costs:
- Can be deducted; and
- Are calculated during budget planning and are taken into consideration when determining the total bill for the end product
Labor cost may be affected by:
- The efficiency of construction methods
- The need, or lack of need, for overtime hours
- The level of quality control you choose to implement on a specific project
Because labor cost is more flexible than materials cost, labor is often targeted first if and when budget cuts may be needed.
Material cost can be influenced by:
- The type and grade of materials used in the project
- Overhead and margin
- Freight costs, including shipping, customs fees, import/export fees, and air freight
- Market competition at the time of purchase
What Goes Into Direct Labor Cost?
Direct labor refers to anyone directly involved in the construction project.
This includes the cost of wages and benefits for employees including the:
- Foreman
- Laborer
- Pipefitter
- Rigger; as well as
- Any administrative expenses.
Direct labor cost will be figured by determining how much it costs per day to have each employee on the job.
This number will then be multiplied by how many days the job will potentially take.
When figuring the direct labor cost of a construction project, it is important to include not only the hourly wage, but also:
- Insurance
- Workman’s comp
- Overtime pay
- Taxes; and
- Any other costs that may potentially be incurred in the completion of the project.
The cost for subcontractor labor will need to be considered in the total as well.
What Is Included in Material Cost?
Material cost includes all the tangible items that go into the finished product.
When calculating material costs, both indirect and direct materials will be taken into consideration.
Direct material includes things such as:
- Wood
- Concrete
- Steel
- Travel expenses
- Computer usage charges
Indirect material includes items like:
- Nails
- Screws
- Fasteners
The cost for any equipment that you will need to lease should also be factored into the materials cost.
In addition, some contractors will choose to include the cost of materials delivery and potential wastage in their material costs totals.
Why Is it Necessary to Calculate Labor and Material Costs?
It is important to calculate all labor and material costs and list them in detail to protect the ability to place a mechanic’s lien — should the need arise.
A mechanic’s lien is a legal claim against a construction project that ensures the right of the filer to seek unpaid compensation.
The lien is generally filed by contractors, subcontractors, or suppliers when they have not received a timely payment for completed work or for materials they provided for a construction project.
Since the mechanic’s lien claim must be able to clearly identify the labor and material provided by the claimant, proper attention to detail when making this calculation is critical.
The scope of the descriptions required for the filing of a mechanic’s lien can vary from state to state, but most states require a description of labor and material to verify that the claimant supplied them for the construction project.
Since the filing of a lien is time-sensitive, a claimant can potentially miss a deadline and lose their lien rights if their claim is rejected.
For this reason, it is critically important to have all labor and material costs properly documented and calculated ahead of time.
Labor and Material Bond FAQs
If you are employed in the construction industry, having a Labor and Material Bond can make a huge difference. Below we take a closer look at Labor and Material Bonds.
What Is a Labor and Material Bond?
Also referred to as a Payment Bond, a Labor and Material Bond is a form of insurance that protects the owner from a mechanic’s lien claim or any other type of claim against the property title for non-payment.
In addition, it protects the suppliers and subcontractors by ensuring that they will receive payment for the work they have done.
To bid the job, a Labor and Material Bond generally starts with a Bid Bond. Once the job has been awarded to the winning bidder, the bond will then be required as a security in order to ensure the job’s completion.
The Labor and Material Bond forms a three-way contract between the contractor, the owner, and the surety, to ensure that all subcontractors, laborers, and material suppliers will be paid — leaving the project lien-free.
Labor and Material Bonds are required on most public projects, and they are frequently required on conduction projects by private owners as well.
If the general contractor neglects to pay subcontractors or suppliers promptly, the subcontractors and suppliers are entitled to make a claim against the Labor and Material Bond.
Labor and Material Bond claims are filed in place of mechanic’s liens, which, as a rule, can not be placed on public property.
What Are Some Advantages of a Labor and Material Bond?
Why is a Labor and Material Bond helpful?
Here are a few of the main reasons:
- It provides an incentive to see a project through to completion.
- It can mean happier workers since they are guaranteed that they will be paid.
- Since Labor and Material Bonds are an alternate form of action from filing a mechanic’s lien, they may reduce the number of mechanic’s liens.
What Does an Average Labor and Material Bond Cost?
The average cost for a Labor and Material Bond will vary from contract to contract, but is typically less than 1% of the contracted price.
However, if the contract price is under $1 million, the premium may be between 1% and 2%.
When determining the rate for a Labor and Material Bond the following factors are taken into account:
- The size of the job
- The terms of the contract
- The amount of bonding coverage required
- The credit score of the principal contractor
- The principal contractor’s:
- Work record
- Credit score
- Other financial credentials
Where Can You Find a Labor and Material Payment Bond Form?
A Labor and Material Bond may be required on many public-funded construction projects and the Labor and Material Payment Bond form can be found at the US General Services Administration website.
The application asks for the penal sum of the bond as well as the full legal name and address of the:
- Principal
- Individual sureties; and
- Corporate sureties.
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