Chapter 7

Labor

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 Outline

• Labor Hours And Productivity

• Unions—wages And Rules

• Open Shop

• Labor Burden

• Pricing Labor
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 Labor Hours And Productivity

 Estimating labor requires determining the number of labor hours to do a specific task and
then applying a wage rate. A labor hour is defined as one worker working for one hour.

 Determining the labor hours requires knowing the quantity of work to be placed and the
productivity rate for the specific crew that will perform the work.

 The crew is an aggregation of construction trades working on a specific task.

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 Labor Hours And Productivity

 The productivity rate is often expressed as a number of labor hours per unit of work,
although it may also be expressed as the quantity of work performed by a crew during a
standard eight-hour day.

 The productivity rates can come from a number of sources, but the most reliable source is
historical data.

 The advantage of historical data is that it reflects how a particular company’s personnel
perform the tasks.

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 Labor Hours And Productivity

 The historical productivity rate is determined by dividing the total number of labor hours to
complete a task by the actual quantity of work performed, as shown in Formula 7-1.

Productivity rate = Labor hours Formula 7-1

Quantity

 Without the labor hours or the quantity of work performed, it is impossible to determine a
productivity rate from historical data

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 Labor Hours And Productivity

• Example 7-1 Historical Productivity Rate

Type of work—8'' ´ 8'' ´ 16'' Concrete Masonry Units (CMUs)

Quantity of work—1,700 square feet

Labor cost—$6,987

Labor hours—170 labor hours

Productivity rate = 170 labor hours = 0.1 labor hours per sf

1,700 sf
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 Labor Hours And Productivity

 Formula 7-2 is used to determine the estimated number of labor hours for a task using the
productivity rate.

• Labor hours = Quantity takeoff X Productivity rate Formula 7-2

 The productivity rate that is used, if derived from historical data, is for the average or
standard conditions for the projects used in calculating the historical production rate.

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 Labor Hours And Productivity

 On many occasions, the project that is being bid deviates from these standard
conditions. Therefore, the number of labor hours needs to be modified to take into
consideration how the project that is being bid deviates from the standard condition.
This is done by using a productivity factor.

 Formula 7-3 is the mathematical means by which the productivity factor is applied.

Adjusted labor hours = Labor hours X Productivity factor Formula 7-3

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 Labor Hours And Productivity

 The productivity factor is a combination of several variables or conditions.

 When the conditions slow the progress of the work, a productivity factor greater than
one is used, thus increasing the number of labor hours to complete a unit of work.

 When the conditions increase the speed at which the work progresses, a productivity
factor less than one is used, thus decreasing the number of labor hours to complete a
unit of work.

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 Labor Hours And Productivity

 Following are some variables that need to be considered when determining the
productivity factor.

o Availability and Productivity of Workers. When there is plenty of work available

and workers are scarce, less- trained craft persons are accepted. These less-trained
persons will require more time or labor hours to complete the required task, and a
productivity factor greater than one is used. Conversely, when construction projects are
scarce, workers may become motivated, and the contractor can be selective and hire
only the most qualified workers. This will result in producing more work per labor
hour, and a productivity factor less than one is used

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 Labor Hours And Productivity

o Climatic Conditions. Cold, hot, winds, rain, snow, and combinations of these all affect
the amount of work that can be produced in an hour. Typically, any weather extremes
will slow down the work pace and may require additional precautions that add labor
hours to the project. The estimator must try to factor in each of these to deter- mine the
most cost-effective approach

• A productivity factor of less than one would be used when the anticipated weather conditions
are better than the average weather conditions for the historical data.

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 Labor Hours And Productivity

o Working Conditions. The job site working conditions can have a great effect on the
rate of work.

• A project being built in the city with little working space, limited storage space, and difficult
delivery situations typically has less work accomplished per labor hour just due to the
difficulty of managing the resources. The same may be true of high- rise construction where
workers may have to wait for the crane to deliver materials to them, have difficulty moving
from floor to floor, and take extra time just to get from where they punch the time clock to
where they will be working.

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 Labor Hours And Productivity

o Other Considerations. Workers seldom work a full 60 minutes during the hour.
Studies of the actual amount of time worked per hour averaged 30 to 50 minutes. This
is often referred to as system efficiency. Keep in mind that the time it takes to “start
up” in the morning, coffee breaks, trips to the bathroom, a drink of water, discussing
the big game or date last night, lunches that start a little early and may end a little late,
and clean-up time all tend to shorten the work day.

• When keeping historical records for the labor productivity, it is important that a record
not only of the productivity rate be kept, but also under what conditions that
productivity rate was achieved so that an appropriate productivity factor can be used.

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 Labor Hours And Productivity

• EXAMPLE 7-2 LABOR HOURS

Type of work—8'' X 8'' X 16'' Concrete Masonry Units— Decorative
Historical productivity rate—0.1 labor hours per sf Productivity factor—1.1
Crew—three masons and two helpers

Labor hours =1,000 sf X 0.10 labor hours per sf = 1 00 labor hours

Adjusted labor hours = 100 labor hours X 1.1 = 110 labor hours

• Sixty percent (3/5) of the hours will be performed by masons and 40 percent (2/5) will be performed by their helpers.

Mason labor hours = 0.60 X 110 labor hours = 66 labor hours

Mason helper labor hours = 0.40 X 110 labor hours = 44 labor hours

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 Labor Hours And Productivity

 Another method of determining the productivity rate is cycle time analysis, which is used
when the work is performed in a repeatable cycle.

 An example of a cycle is a truck hauling earthen materials from the borrow pit to the job site
and returning to the borrow pit to make a second trip.

 Cycle time analysis is used extensively in excavation estimating. Cycle time analysis is
performed by timing a number of cycles, ideally at least 30.

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 Labor Hours And Productivity

 Using the average cycle time (in minutes), the productivity rate is calculated using Formula 7-
4.

 The average cycle time is determined by summing the cycle time and by dividing the sum by
the number of observations. The productivity factor is the same as the productivity factor used
in Formula 7-3

 Productivity rate

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 Labor Hours And Productivity

Example 7-3 Productivity Rate Using Cycle Time

• Type of work—Hauling materials from the borrow pit

• Average cycle time—35 minutes

• Truck capacity—17 tons

• Crew—One driver
• Productivity factor—0.95
• System efficiency—45 minutes per hour

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 Labor Hours And Productivity

 When the work is performed linearly (such as paving or striping a road, placing a concrete
curb using slip-forming machine, or grading a road), the rate of progress may be used to
determine the productivity rate. The productivity rate is calculated using Formula 7-5.

 Productivity rate =

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 Labor Hours And Productivity

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 Labor Hours And Productivity

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 Labor Hours And Productivity

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 Unions—Wages and Rules

 The local labor situation must be surveyed carefully in advance of making the estimate. Local
unions and their work rules should be given particular attention, since they may affect the
contractor in a given community.

 The estimator will have to determine whether the local union is cooperative and whether the
union mechanics tend to be militant in their approach to strike or would prefer to talk first and
strike as a last resort.

 The estimator will also have to determine whether the unions can supply the skilled workers
required for the construction. These items must be considered in determining how much work
will be accomplished on any particular job in one hour

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 Unions—Wages and Rules

 While surveying the unions, the estimator will have to get information on the prevailing
hourly wages, fringe benefits, and holidays; also the date that raises have been negotiated,
when the present contract expires, and what the results and attitudes during past negotiations
have been.

 If the project will run through the expiration date of the union contract, the estimator will have
to include enough in the prices to cover all work done after the expiration of the union
contract.

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 Open Shop

 The construction unions have experienced a decline in membership over the years. The open
shop contractor or subcontractor does not have to deal with restrictive union work rules,
which gives the contractor greater flexibility and allows craft persons with multiple skills to
stay on the project longer and perform a greater portion of the work.

 The downside of this arrangement is that the quality of the craft persons is not known when
hired.

 open shop contractors cannot go to the union hall looking for craft persons. Rather, they must
directly hire all their craft personnel, which adds to higher turnover and training costs if craft
labor is in short supply.
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 Labor Burden

 The wages paid to labor are known as the bare hourly wage rate or bare wage rate (in the case
of salaried employees). In addition to the bare hourly wage rate, the contractor incurs a
number of costs associated with employing the labor that needs to be included the labor rate.
These costs are known as labor burden.

 The bare hourly wage rate plus the labor burden is known as the burdened hourly labor rate.
The burdened labor rate is calculated by totaling all of the costs of the employee over the
course of the year or the project and dividing these costs by the number of hours that are
billable to the project during the year or the duration of the project.

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 Labor Burden

 The following costs should be included when calculating the burdened labor rate.

 Cash Equivalents and Allowances. Cash allowances are funds paid to the employee for the
employee to pro- vide his own tools or for the use of his personal vehicle. Cash allowances are
not reimbursements to the employee for actual expenses, but an allowance given to the
employee to defer the cost of providing his own tools and vehicle.

 Cash allowances are treated as taxable income to the employee, whereas reimbursed
expenses are not.

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 Labor Burden

 Payroll Taxes. Employers and employees are required to pay social security and Medicare taxes by
the Federal Insurance Contribution Act (FICA).

• Some benefits, such as health insurance costs paid by the employee, may be deducted from the
employee’s gross wages when determining the employee’s taxable wages.

• Estimators should check with their accountant to see which benefits can be deducted from the
employee’s wages before calculating the employee’s taxable wages and the social security and
Medicare taxes.

• The social security and Medicare taxes paid by the employer represent a cost to the employer and
should be included in the labor burden. The social security and Medicare taxes paid by the employee
are deducted from her wages and are not a cost to the employer.
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 Labor Burden

 Unemployment Insurance. The Federal Unemployment Tax Act (FUTA) and State
Unemployment Tax Act (SUTA) require employers to provide unemployment insurance for
their employees. This is done by paying a FUTA tax and, where state programs exist, a SUTA
tax. The FUTA and SUTA tax is paid entirely by the employer and is a labor burden cost.

• The SUTA tax rate paid by an employer is based in part on the company’s unemployment
claims history. Companies that frequently lay off employees, which leads to more
unemployment claims, pay higher SUTA rates than do companies that have a stable workforce
and low claims.

• A company should contact the state agency that is responsible for administrating the state
unemployment insurance program to obtain their SUTA rate.
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 Labor Burden

 Workers’ Compensation Insurance. Workers’ compensation insurance provides medical

insurance benefits and may reimburse some of the lost wages to employees injured on the job
or who contract an occupational illness. It may also provide some death benefits for
employees killed on the job.

• The workers’ compensation insurance is paid entirely by the employer and is a labor burden
cost.

• The premium for workers’ compensation insurance is based upon the dollar value of the
payroll, the type of work being performed, and the accident history of the company.

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 Labor Burden

 General Liability Insurance. General liability insurance provides the company with
protection from lawsuits arising from negligence of company employees, including:

• Bodily injury,

• Property damage or loss,

• And damage to one’s reputation due to slander.

 The general liability insurance premium is a percentage of the company’s payroll. The rates
are different for different classes of employees and are highest for management personnel who
are responsible for making the decision.
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 Labor Burden

 Insurance Benefits. Companies often provide employees with health, dental, life, or
disability insurance.

• The companies may pay all, part, or none of the premiums. The portion of the premiums paid
by the employer represents a cost to the employer and is part of the labor burden.

• The portion of the insurance premiums paid by the employees is deducted from their wages;
therefore, these costs are not part of the labor burden.

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 Labor Burden

 Retirement Contributions. Many employers provide employees with access to 401(k)

retirement programs or other retirement programs.

• Often the employer contributes money to the employee’s retirement program.

• The amount the employer pays may be based upon many things, including matching a
percentage of the money the employee con- tributes to the plan.

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 Labor Burden

 Retirement Contributions Cont.

• When estimating retirement costs based upon matching employee contribution, the employer
should take into account the amount the typical employee contributes to her retirement
program.

• When the employer pays money into an employee’s retirement plan, this money represents a
labor burden cost to the employer. The money the employee contributes to the plan is taken
out of the employee’s wages and should not be included in the labor burden.

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 Labor Burden

 Union Payments. When employees belong to a union, the employer is responsible for making
payments to the union. These funds are used by the union to provide benefits (such as
retirement and insurance) and training (such as apprentice programs) for the employees.

• The amount the company must pay to the union is found in the union contract.

• The union may also require the company to deduct union dues from the employee’s paycheck.

• The payments made by the company are a labor burden cost, whereas the union dues deducted
from the employee’s pay- checks are not.

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 Labor Burden

 Vacation, Holidays, and Sick Leave. Vacation, holidays, and sick leave are incorporated into
the labor burden by including the wages paid for vacation, holidays, and sick leave in the
employee’s wages before other burden costs are calculated.

• By doing this, the burdened cost associated with vacation, holidays, and sick leave is included
in the total wages.

• When determining the burden hourly wage rate, the vacation, holiday, and sick leave hours are
not included in the billable hours. This incorporates the vacation, holiday, and sick leave costs
in the burden.

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 Labor Burden

 Burdened Hourly Wage Rate. The cost of any other benefits paid by the employer should
be included in the cost of the employee before determining the burdened hourly wage rate.

• The billable hours should only include hours that are billable to a project and should not
include vacation, holiday, and sick leave hours.

• The burdened hourly wage rate is calculated using Formula 7-6.

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 Labor Burden

 Example 7-5 Burdened Hourly Wage Rate

Craft—Mason

Wage rate—$29.00 per hour

Hours worked—50 hours per week for 20 weeks and 40 hours per week for 29 weeks

Paid vacation, holidays, and sick leave—Three weeks at 40 hours per week

Overtime—Time-and-a-half for any hours over 40 per week

Gas allowance—$100 per month

Annual bonus—$500

Social security—6.2 percent on the first $106,800 of wages

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 Labor Burden

 Example 7-5 Burdened Hourly Wage Rate Cont.

Medicare—1.45 percent of all wages

FUTA—0.8 percent on the first $7,000 of wages

SUTA—4.5 percent on the first $18,000 of wages

Worker’s compensation insurance—$7.25 per $100.00 of wages

General liability insurance—0.75 percent of wages

Health insurance (company’s portion)—$300 per month per employee

Retirement—$0.75 per $1.00 contributed by the employee on 6 percent of the employee’s wages
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 Labor Burden

 Example 7-5 Burdened Hourly Wage Rate Cont.

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 Labor Burden

 Example 7-5 Burdened Hourly Wage Rate Cont.

 The company contributes up to 4.5 percent (75 percent of 6 per- cent) of the employee’s wages to the
employee’s retirement account. Assume that the employees take full advantage of this benefit.

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 Pricing Labor

 To price labor, first the estimator must estimate the labor hours required to do the work.
These labor hours can then be multiplied by the burdened wage rate to develop the labor
costs.

 when the crew is made up of different crafts being paid different wage rates, a weighted
average burdened wage rate must be determined. This is done by determining the total cost
for the crew for an hour and by dividing that amount by the number of persons on the crew,
as shown in Figure 7.2 (next slide)

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 Pricing Labor

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 Pricing Labor

 Once the average crew wage rate has been found, it can be multiplied by the number of
labor hours to determine the labor costs. Formula 7-7 is used to determine the labor costs.

 Labor cost = Adjusted labor hours X Weighted average burdened wage rate

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 Web Resources

www.irs.gov

www.constructionbook.com

www.rsmeans.com

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 Assignments

1. How do allowances differ from reimbursements?

2. How are vacation, holidays, and sick leave included in the labor burden?

3. How can working conditions on the job site affect worker productivity?

4. What effect could an extreme shortage of skilled workers have on the cost of a project?

5. What effect can upcoming labor union negotiations have on a bid?

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