Last month we discussed the importance of properly estimating total labor hours when determining a bid price. However, this is only one step in the process. Accurately estimating the labor cost for a job is just as important, and it can be the difference between making money and losing it.
To determine the estimated labor cost for a job, multiply the total adjusted labor man-hours by the labor rate per man-hour. This is not as easy as it appears. First, you must determine the anticipated labor required to complete the project (total adjusted labor man-hours). Use the time-tested labor units based on the material needs of the project, adjusting those labor units to accommodate the expected working conditions of the job, and then add any additional labor not included in the original take-off (see last month's article, “Labor Hours and the Estimate Summary,” page 46).
Second, determine an appropriate labor rate per man-hour. Again, this is not as easy as you might think. You have to decide if you're going to use a shop average labor rate or a weighted job average labor rate. The labor cost per man-hour is significantly different in different areas of the country. For example, in the Southeast, a qualified licensed electrician might have a base pay rate of less than $15 per hour. In the North or Midwest, the base pay rate might be over $50 per hour. Therefore I have elected to use $21 per man-hour for this discussion.
Shop average labor rate
The shop average labor rate can be determined in any number of ways, but I prefer to divide the total field labor cost for the past 12 months by the total number of field man-hours for the past 12 months. See Table 1 for an example of this method.
But be careful! If you bid a commercial job using the average shop labor rate of $19.76 instead of the commercial-job average labor rate of $21, you'll probably get the job, but you'll lose your shirt. The difference between the two figures is especially important when you factor in labor burden, overhead, and profit. If you bid a residential job using the average shop labor rate of $19.76 instead of the residential-job average labor rate of $14.60, you'll have priced yourself out of the market, and you won't get any work.
Job average labor rate
The job average method is one way of determining the labor rate for a job. This method requires you to anticipate the job crew, their skills, and their wage for the duration of the job. To determine this rate, calculate the number of persons on the job and their average rate. Naturally, this requires you to know the difficulty level of the job and how you expect to man the job.
If you incorrectly estimate how the job will be manned, you could end up with an overqualified crew and increased labor costs. At the other end of the spectrum, an incorrect estimate could leave you with a less-skilled staff, and this can result in a significant increase of labor hours and a likely increase in labor costs.
Using the shop average labor rate of $21 for all jobs can present the following problems.
Commercial jobs require highly skilled and experienced electricians. The job average labor rate of $21 (as shown in Table 2) is higher than the shop average labor rate of $19.76.
Electricians working on a residential housing project need not be as skilled. As a result, the job average labor rate of $14.60 (as shown in Table 3) is much lower than the shop average labor rate of $19.76.
You also must not forget to include in the estimate other related labor costs such as payroll taxes, insurance, vacation pay, holiday pay, sick pay, and pension. Typically, labor burden represents 38% of your total labor cost.
The labor rate that union contractors use in their estimates includes many of the labor burden items discussed above. As a result, the labor rate for a union electrician appears to be much higher than a nonunion electrician. But once labor burden and productivity are factored into the nonunion labor rate, practically no difference in wages exists between highly skilled and productive union and nonunion electricians.
Once you've got the different labor rates straight, estimating your labor costs will be much easier. And with this knowledge, you're ready to tackle next month's topic, material cost.