Get a Grip on Estimating Labor

By Charles Vander Kooi

I have yet to meet the contractor I can't make profitable if he or she will focus on just 2 things: the control of labor and overhead. Sad to say, most contractors focus on something else: getting work and growing their company.

A major bonding company (an insurance company that guarantees that a contract will be performed at the original bid price even if the contractor goes bankrupt) conducted a survey of contractors who had declared bankruptcy to discover why they went bankrupt.

Do you know how many contractors they found who had gone broke due to a lack of work? NONE! Do you know how many contractors had gone bankrupt because they had taken on too much work too fast and for too cheap? LOTS OF THEM!

A contractor's primary focus must be on the control of labor and overhead. We'll save overhead for another time so we can address controlling labor here.

Figuring Labor is Risky

Labor is the greatest risk in your estimating strategy.

I have never stayed up nights worrying if I have placed enough for materials in a bid. If you can't take-off material from a drawing, get out of town.

I have never stayed up nights worrying about subcontractors. If I know what the subcontractors have included and have covered what they have excluded, I can sign them up and get them to do their work.

It's not rocket science to figure equipment hours either. Equipment hours follow labor hours, so if labor is right, then my equipment will be right.

I have, however, stayed awake many a night worrying if I had enough or too much labor in an estimate.

When I deal with labor on an estimate, I never deal in dollars and cents. Rather, I use production hours. Production hours are the most stable way of estimating labor for the long term.

If I pour 30 sq. ft. of concrete per hour and I have 300 sq. ft. to pour, then I need 10 production hours, or if I can put in 5 feet of water line per hour, and I have 50 feet total, I need 10 production hours.

3 Reasons to Deal in Production Hours

The dollars-and-cents labor costs become antiquated very quickly. You could show me labor for a job you did yesterday, but as soon as you give anyone a raise on that crew, your costs will be out of date.

If you had a foreman with 5 low-priced laborers-who lower your labor costs per hour-doing the work on a job, but on the next job that same foreman has only 2 low-priced laborers, your costs will be antiquated.

I know how many production hours are necessary to form and pour and finish small concrete slabs, so I have been using these same production rates for years.

Workers form and pour and finish small concrete slabs the same way today that they did 20 years ago. Do you think that labor costs are the same today as they were 20 years ago? Of course not! What has changed? The cost of labor per hour.

I can use the same production rates and be current on my labor costs by multiplying the production hours by today's average wage.

The second reason I use production hours is that it is easier to vary production hours than to vary dollars-and-cents labor costs.

For example, suppose I am a landscape contractor and I can plant a tree every hour and 30 minutes if I can get a tree on a truck and get that truck near the hole. I have 10 trees to plant, and 5 I can get near with a truck. I will need to tractor 5 others into another area and carry them the last 50 feet. It will take an extra 30 minutes on those 5 trees.

I can vary my final production hours by figuring 15 hours to plant in normal conditions and another 2 1/2 hours for the 5 that are more complicated. Total: 17 1/2 production hours.

Another reason I use production hours is because field people think production. Still assuming you are a landscape contractor, let's say you have done a bid based on dollars-and-cents labor costs and you have arrived at a total labor cost of $900 to do some planting.

If you go to your foreman and tell him to get that truckload of trees planted for $900, what will he say? ' What do you mean $900? Who is paid what? '

But, if you have arrived at your labor costs by production hours multiplied by the average wage and you have calculated 80 production hours, then you can tell him that with a 4-man crew working 10 hours a day, he has 2 days to do the job.

Does your foreman understand that kind of goal? Of course he does, because that's the way field people think: How many people are you giving me and what's my deadline?

Production Hours are Key to Control

I love job costing, but the problem with it is, when you finally get the figures, the job is over. Of course, the idea is to track your production hours from past jobs so that you can accurately estimate how many hours future jobs will take.

I have clients who know how much material needs to be installed in a day to stay on schedule. Based on the production hours in the estimate to install that material, they can determine how large a crew to send out to the job to finish the work in a day.

They can check on that job in the middle of the day and quickly see what has been installed and the hours used to see if that job is on target. If the crew doesn't get all the material installed in a day, it's obvious to everyone that they're overrunning the estimate.

This kind of labor control only happens when a contractor deals with labor on their estimate in production hours, not in dollars-and-cents labor costs.

Factoring in Downtime

Once I have arrived at the production hours for a certain type of work, I multiply those hours by the average wage for that crew. To find the average wage for bid purposes, I put together an average crew with their different hourly wages.

These wages totaled will tell you the cost of that crew for an hour's work. By dividing that amount by the number of people on the crew, you arrive at the average wage. Now add a factor for overtime to that hourly cost.

For example: If you're working your crews 50 hours per week, you're paying them time for 55 hours per week. That means you're paying for 5 hours of time each week from which you are receiving no production. Since 5 hours is 10% of 50 hours you will need to add 10% to the crew's average wage to cover the non-productive hours.

Factoring in the Unexpected

To this figure I also add a 'fudge factor'. This number compensates for the difference between how long you think something will take and how long it actually takes.

For example, your foreman comes in and says he can't find the key to the skid loader. The crew looks in the ash trays of the trucks and their pockets. After 15 minutes with 4 people looking, the crew finds the key. It was in the ignition of the skid loader.

So, now the crew tries to start the skid loader, but it won't turn over. They run the battery dead. Someone is sent to get the jumper cables out of a truck, but someone else has taken the jumper cables. The foreman sends someone to the nearest discount store to get jumper cables. (Sound like one of your jobs?)

The crew hooks up the jumper cables, but the skid loader still will not start. The gas tank is empty. Someone goes to the company truck to get their extra five-gallon can of gas, but someone else forgot to fill it up after they used it, so someone else heads off to a gas station.

In the end 4 people just spent an hour to get the skid loader started. Where is that in your bid?

Or, here is my favorite: You're on the job, rain clouds move in and it begins to sprinkle. However, other than your area, there is blue sky all around. Your foreman looks up and sees all the blue sky and determines the storm will not last long.

Then he says the worst thing he can say, "Let's get in the trucks and wait it out." He was right, the storm only lasted half an hour and they were going to get out and go back to work, but their favorite song came on the radio. It's another 10 minutes before they get out of the truck and go back to work. Where is that time in your bid?

How Much Fudge to Factor?

I suggest that if you know your crew's production rates and are very comfortable with them, you still add a 5% fudge factor to the average wage. If you feel moderately comfortable with them, add 10%. If you have never estimated in production hours before-and you will be trying to determine them as you estimate-add 15% until you get more comfortable with the process.

Now, it is very important to add this fudge factor to the wages and not the hours. The reason is because I want to hide that fudge factor from 2 different groups of people.

Let's say you have a bid with 1000 production hours and you would add 10% or 100 hours for the fudge factor. As you begin to think about the job, you might say ' I want this job. I need this job .'

With these thoughts in mind, what might you take out of that bid? The 100 hours of fudge factor. You get the job. How long does it take to do the job? 1,100 hours. Crews are still going to misplace the key to the skid loader, have trouble starting it, and run to get jumper cables and gas. It is still going to rain and workers will still sit in the trucks.

Can you imagine telling a foreman that he has 1000 hour to do a job, but you have also added 100 hours for wasted time and mistakes. He'll say to himself, " No problemo, I'll take care of those 100 hours. "

I don't add the fudge factor to the hours but to the average wage so that neither the owner or manager nor the field people can see it and take advantage of the extra hours.