Inside Labor Rates
Trust but Verify
How do we know what we’re paying for?
We can all agree that labor is a significant driver in the cost of any construction project, typically in the range of 30-40% of the overall cost, and as such it’s important that we understand the underlying math. It’s a subjective exercise and much simpler than the nuance that surrounds estimating labor hours and productivity. However, this is often an overlooked area when it comes to evaluating costs.
What’s in a Labor Rate?
A typical labor rate will include the following:
Base Wage - hourly rate paid directly to the worker.
Benefits - Health insurance, retirement contributions, vacation, paid holidays.
Insurances - Worker’s compensation, liability, auto, and other required coverages.
Taxes - Payroll taxes, unemployment insurance, and other obligations.
Most construction contracts will define the items above, and their subcomponents, but it’s important to verify what your project’s contract allows for. Once you know what those components are, it makes the process of validating labor costs that much easier. Typically when a labor detail is requested from a contractor or subcontractor, it will be grouped into these categories making it easier to line up against the contract terms.
The Risk of Blind Approval
Across the various projects we’ve been engaged on, we’ve reviewed hundreds of labor rates across different trades, regions, and sectors. Of the reviews we’ve done, less than 5% have been in line with the contract terms prior to being reviewed and the average reduction to proposed labor rates is in the range of 10%. Going back to the first sentence, let’s run a hypothetical scenario that involves a project with an initial GMP of $50M. Through the course of construction, change orders and contingency use amount to $5M or 10% of the initial contract value. Using the 30-40% range, this would imply cost of labor to be in the range of $1.5-2M. Assuming a 10% reduction in the cost of labor, we’re talking about a potential impact of $150-200k - even if we were to only allow for 5%, this scenario would still result in $75-150k. A significant savings for an exercise that typically takes no more than a few weeks.
Without asking for the detail, we would be operating multi-million dollar projects on trust alone. While trust is important and necessary for a successful project, so is transparency and there is no substitute for verification. At minimum, requesting the detail will provide you with the certainty that what you’re paying is fair.
Bottom Line
First, if you’re not asking for detail from your contractors and subcontractors as to what is included in their labor rates, it’s quite likely you are leaving money on the table.
Even if you are requesting breakouts, the next question is “How do I know the values are accurate?” Many of us don’t have experience evaluating insurance rates, understanding benefits calculations, or experienced on how wage basis impact taxes. And why would you? It’s a niche skillset that doesn’t have to be exercised routinely on construction projects. In fact, if you do it at the beginning of the job when subcontracts are being awarded, it’ll save everyone from potentially contentious scenarios down the road.