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Labor Shortages and Construction Cost Estimation

Labor shortages contribute to delays, cost increases and quality issues that can directly impact client satisfaction. It’s vital that construction executives understand how labor shortages are impacting their business and seek solutions.

One option is to learn more about how construction labor estimates are calculated. Here are three methods to consider: Unit pricing, the rule of two and model estimates.

Unit Pricing

The availability and quality of workers have a significant impact on labor costs. When worker shortages occur in a particular region, construction companies have to compete for limited skilled workers. As a result, their labor costs rise. In addition, weather conditions can cause construction activities to peak during certain times of the year, which can also lead to higher labor costs.

Unit pricing involves assigning a cost to specific construction activities based on unit rates, which are calculated from historical data or industry benchmarks. These unit rates are then multiplied by the quantities of each construction activity to calculate labor costs. This method can help to simplify construction costs by reducing the number of variables.

A number of different pricing methods can be used in construction projects. These include unit price contracts, lump sum, and time and materials. A time and materials contract uses a blended approach that factors in unit prices, while a cost-plus contract adds a profit margin on top of the unit price.

Unit price contracts are useful for construction projects that can be logically split into bundles of work that are easily quantifiable. The contractor can then add and bill for pre-priced units should the project grow in scope. This can protect a company’s profitability and reduce the risk of overruns. There are a number of sources for unit pricing data, including Sweets’ Catalog and periodicals that contain cost data and indices. The Engineering News-Record, for example, publishes a cost index each quarter.

The Rule of Two

The Rule of Two is a popular method that combines materials and labor costs for simple estimates. This method is effective when estimating construction costs for jobs that are straightforward and quick to execute. However, this method can be misleading if not accurate.

When calculating labor costs, it is essential to understand the distinction between direct and indirect labor. Direct labor costs include wages and salaries for workers who are directly involved in physical construction tasks. This includes carpenters, masons, electricians and other skilled tradesmen. Indirect labor costs, on the other hand, cover the salaries and benefits of workers who indirectly support construction activities. This includes project managers, foremen and supervisors, as well as safety officers and quality assurance personnel who ensure compliance with standards. Indirect labor costs also include the salaries of staff who handle support functions such as accounting, procurement and human resources.

Indirect labor costs can increase or decrease depending on general market conditions and economic trends. For example, a shortage of skilled workers may push up labor costs. Indirect labor costs may also be impacted by government policies and regulations. For example, increased minimum wage rates can raise construction labor costs for low-skilled workers. Inflation in material prices can also influence indirect labor costs. The cost of raw materials is typically volatile and can be influenced by geopolitics, supply chain capacity and other factors.

The Three-Point Estimate

Three-point estimation is a project management technique that eliminates bias and uncertainties when calculating activity costs or duration. The process involves determining how long an activity should take by evaluating the best-case scenario, worst-case scenario, and most likely outcome. This allows teams to design schedules that are realistic, avoid wasting time, and provide transparency for stakeholders.

To make a three-point estimate, team members must first determine how long an activity will take by using data from previous projects, industry benchmarks, consultant expertise, or expert knowledge. The next step is to estimate how many labor hours each task will require. This information is then multiplied by the appropriate labor rate to calculate an estimated cost for each task. Finally, the total estimated cost of all tasks is summed to produce the overall project budget and timeline.

Compared to other methods, the advantages of the three-point estimate are significant. By eliminating bias and uncertainties, the process produces estimates that are more accurate and consistent than those based on parametric techniques.

In addition to its efficiency, the three-point estimation method offers valuable insight into potential risks and uncertainties in the project. By analyzing the optimistic, pessimistic, and most likely scenarios, managers can assess and evaluate risk, which will help them devise proactive risk mitigation strategies. A variation on the three-point estimation is known as PERT distribution, which uses a formula that takes into account the variance between estimates and weights them based on the severity of the outcomes.

Alternative Labor Options

Construction companies can no longer ignore the labor shortage. Wages are rising—with the latest wage growth surpassing prepandemic levels—and intense competition for experienced workers is pulling them into other sectors such as transportation and warehousing. As a result, the COVID-19 labor mismatch is driving up costs, undermining productivity, and extending project schedules. Unless thoughtful action is taken, the problem is set to get worse.1

Source: US Bureau of Labor Statistics. Data as of October 2021.