labor cost in construction

How to reduce labour costs in construction projects


It is estimated that just over two thirds of the final sales price of most construction projects goes to building costs which are typically split evenly between materials and labour costs, depending on the nature and size of the project. After any remaining costs are deducted, construction organisations can expect gross margins of just under 20%. Although these figures appear quite reasonable in theory, they are often far from the truth as labour costs can be unpredictable because they are conditioned by various factors. In this article, we share with you some tips on how to lower your labour costs, without cutting the pay of your workers, to increase your profit margins.

Assess costs from the beginning

If this isn’t your first project, you probably have an approximate idea of what your labour costs look like. Generally, previous projects provide a good baseline to start building your estimate. Things like worker turnover and surges in labour costs should be factored in. Before you start, it is important to identify the type of contract that is most appropriate for the project. If you opt for a fixed price contract, the price will be fixed from the onset of the project.

what is labor cost?

If you stick to the predefined deadlines, the price will not increase. On the other hand, if you go for a time and materials contract, what the client will end up paying will be based on the cost of materials and your labour rate. By selecting the most appropriate type of contract, you can avoid overspending.

Evaluate the structure of your crew

Not every great employee is fit for a supervisor role. Some workers are better suited for the position they hold. Evaluate your crew structure to ensure you have the right people in the right place. Capitalise on each individual’s skills and make sure the workers you promote are being promoted because of their skills and not because of tenure. This may put you in an uncomfortable position where you might have to have difficult conversations with some of your workers, namely if you have to demote someone because they were not promoted for the right reasons in the first place. However, as uncomfortable as it might seem, it will be for the best for both your organisation and the worker in the long run.

how to decrease labor cost in construction

Simplify your workflow

Simplifying your workflow is easier said than done. However, if your work flowcharts are not based on accurate projections and objectives, they won’t be effective. Optimise the utilisation of your human resources with the help of team leaders to ensure every worker is placed in the subgroup where their skills will be capitalised on. Establish clear timeframes for each task, and get with your team leaders to compare actual timeframes with those on the flow chart, and where gaps are identified, request an explanation, and adjust your workflow chart as required.

Know your employees

If you review and adjust your workflow often enough, you’ll notice how rich in information they can be. Some of the things you can expect to uncover include employee versatility. When you identify an employee that can perform more than one job, consider cross-training them so they can switch to a different role during their downtime.

If you do that with enough employees, you will save on salary costs because you won’t have to hire extra hands and your productivity will be boosted significantly. Your team leaders can assist with that process since they are the ones on the field and usually know what their crew members are capable of.

labor cost in construction

Go digital

Making the switch from physical paperwork to a fully digital system comes with a myriad of cost saving benefits. First, you will save on commuting costs since you will be able to keep track of every task from wherever you are with the flick of a finger, and therefore won’t have to waste time and money travelling to and from the construction site. Photos of progress and end results will be uploaded to your dashboard as soon as tasks are completed.

Secondly, your supervisors won’t have to spend hours putting paperwork together and manually generating reports for you since all that will be done automatically and seamlessly. This means that they will spend less time on the clock. Finally, GPS-enabled digital timesheets will allow you to track down and eliminate tardiness and timesheet fraud. Timesheet fraud costs are estimated at $10m a year in NSW alone.

Labour costs

Reduce turnover rate

Studies have shown that every time an organisation replaces an employee, it ends up costing them 5 to 8 months of wages on average. Which is why it is important to take your time during the hiring process to ensure you are hiring the right candidate. Find out what their views are on dependability and work ethic during the interview. This will give you a better sense of what their values are as an employee. Once you find the right person, offer them fair wages and competitive benefits to make sure they stick around.

Finally, reward deserving employees when appropriate to make them feel appreciated. This may seem like an additional cost in the short run; however, it will save you a lot more in the long run.

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