More than 55% of the final sales price of a construction project goes to building costs. In general, the cost of labor and materials gets split 50/50 but in some residential homes, it’s close to 30/70.
With the median price of a new home around $320,000, the cost of labor may seem reasonable. Especially considering construction company profits are close to 11%.
There are steps you can take to lower your labor costs without taking money away from your employees. In the guide below, we explain how.
Estimate Costs from the Onset
Unless you’re embarking on your first project, you have a ballpark idea of what your labor costs will be. Use previous jobs as a guide and base your new estimate on what you’ve already done.
Take into consideration employee turnover and increases in the cost of labor. When you’re writing the estimate, decide whether a time and materials contract or a fixed-price contract is best for the project.
There are pros and cons to each, and you may have to negotiate with your client. In a time and materials contract, your client pays the exact cost of the work based on your labor rate and cost of materials.
A fixed-price contract is more rigid. The process is well-defined complete with specific phases and deadlines. If your project doesn’t go beyond the defined outline, the price won’t change.
This may sound risky, but having defined expectations help keep the project on track.
Review Your Site Crew Structure
The housing crisis of 2008 took a major toll in the construction industry. From 2007 to 2011, the industry lost more than 2 million workers. The housing market is back on the upswing and the industry is experiencing considerable growth.
But your workforce may be a composite of employees. You have skilled and unskilled or general labor workers. One of the biggest fallacies in business is that a great employee will make a great supervisor.
It’s not always the case.
Review your site crew structure and figure out if you have the right people leading your teams. If someone is a better worker than a supervisor, you need to discuss further training. Find out if they enjoy leading a team or if they only enjoy the pay raise.
You may be able to work something out where your most skilled workers are doing what they do best without losing their pay increase. It doesn’t sound like spending money will save you costs, but it very well could.
If one of your team leads is excellent at electrical work but is overseeing a lesser-skilled group, you may be losing money. How much time gets spent redoing work? Is he so focused on what he knows that other aspects of the project are falling to the wayside?
How much money is that costing you? If he’s better suited to be on the team than running it, work out incentive-based bonuses so he’s not losing any money.
Streamline Workflow Charts
Every business owner wants to streamline the workflow. The hard part is executing it. If your workflow charts aren’t created with realistic expectations and goals, they’re fruitless.
Your work flowcharts must be well-defined and easy to maintain. You have to work with your crew leaders to decide which laborer fits best in each subgroup.
The time it takes for tasks to get completed needs to be clearly defined. At the end of the day, go over the day’s progress with your crew leaders and compare it to the workflow chart. Listen to the leaders’ feedback and make adjustments as needed.
Know What Your Employees Can Do
If after several workflow reviews you learn one crew member is more versatile than you realized, consider cross-training them. If you have workers who can handle different aspects of the job site, allow your on-site supervisors to make the call where they’re needed most.
During the hiring process, target candidates that are multi-purpose workers. They’ll be able to move from task to task with little downtime.
For example, if your framing crew is waiting on a lumber truck, but Steve does concrete work, have him head over to that crew. Your concrete crew gets another helper and you’re not wasting more salary costs on downtime.
Going paperless on the job site will benefit you in reducing labor costs and being more efficient.
You’ll have the ability to stay on top of all your processes from your office, without stepping foot on the site. Your supervisors won’t have time-consuming paperwork to deal with and you’ll have the data as soon as it gets inputted.
You can track production and your foreman can upload photos to your system dashboard so you’re on top of every phase. You can see who’s on lunch and who was late that morning which reduces time punch errors.
Your project managers can stay on top of the budget on a daily basis without spending valuable time reviewing spreadsheets. You can enter your workflow charts and follow them in real-time.
The average construction worker makes close to $28 an hour so it makes sense you don’t want to hand out raises left and right. You’re likely not a fan of paying overtime either.
Offer competitive benefits that attract the right workers. Consider rewarding your longterm employees with PTO or incentive-based bonuses.
You can reduce turnover by hiring smart. Ask candidates about all skills involved in construction, including work ethic and reliability.
Find out if they’re willing to learn and in what areas. You may interview someone with computer or marketing skills who can fluctuate between the site and the office.
But Don’t Be Afraid to Make Tough Decisions
While you don’t want to continue spending money on hiring and training, you need to take a long hard look at your current workforce. You may have some dead weight on your crew that’s costing you a lot of money.
Try coaching the less-productive employees before letting them go. There could be a miscommunication that’s keeping them from being productive. It’s also possible that they’re just not the right fit.
It’s difficult to let people go, especially when they showed promise. But you’re running a business which means you have to make tough decisions. Put a “three strikes rule” in place, or something that details your expectations.
Take Control of Your Labor Costs
You’re already on top of material and subcontractor costs, so why not have control over your own labor costs?
We’ve designed Rhumbix to make this process easier for you. Accuracy and consistency will never be an issue again.