I’m frequently asked for the “industry standard” labor rate for construction. Well, just like there isn’t an industry standard markup, there isn’t an industry standard hourly labor rate for construction. I’ll often use $40/hour or $75/hour in our articles, but that’s not an industry standard, it’s an example.
There is what I’ll call a regional influence on what contractors are willing to pay for a particular type of labor. The hourly rate in Seattle area for a job foreperson is probably different than the hourly rate in San Francisco, Phoenix, or North Dakota.
If you are the business owner and you’re working on jobs, you may be wondering what to pay yourself. The simple answer is that you should be the highest paid mechanic in your shop. I talk about the importance of paying yourself and how to set your salary in our book Markup & Profit Revisited.
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Keep in mind that what you pay isn’t the same thing as the hourly rate you need to use in estimating, just like it isn’t the charge rate you should quote if you are doing time and material jobs with an hourly rate.
I want to encourage you to do the math for your employees to be sure that the hourly rate you put on your estimate sheet is the amount of money that person is costing you when they set foot on a job. This isn’t what you are paying them; it’s what they cost you. It’s called the burdened labor rate, we have an article that explains how to calculate that rate here.
Why is it important to know the burdened labor rate when you estimate your work? Let me explain.
When you calculate your markup there are three important cost categories – your estimated job costs, your estimated overhead, your profit needs.
Every cost incurred by your business needs to be included in either your job costs or your overhead expenses. No exception. The labor burden is the one that often falls through the cracks. When the markup is calculated, it’s considered a job cost or it’s forgotten altogether. When the job is estimated, it isn’t included because it’s considered overhead.
That leaves it completely out of the sales price, and that costs you money. The biggest error in estimating projects is almost always labor. This can come in two forms, the first being a miscalculation of the amount of time a particular job will take to do. The other one is using inaccurate labor rates for the people working on the job. Your labor hour estimate can be dead on but if you are charging 20% less than you should for the individuals working on the job site that can amount to a substantial loss of money when the job is completed.
When you’re on a sales call, if you’ve missed the labor on the last four jobs you sold and you made little or no profit on those jobs, it is tough to sell that next job because your confidence is down. Your focus then shifts to price instead of selling quality, value and service. That doesn’t work.
Calculate your labor costs, include all the costs in your estimate, and use the correct markup so you can make a profit on your sales.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.
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