Running a construction business can be lucrative but it is one of the most human resource-intensive sectors. Gaining access to quality labor can be expensive. According to Statista, the US employment cost index has seen a significant surge of up to 0.7 percent in 2020.
Add the horrendous impact of the pandemic on the construction industry, companies are struggling to pay their employees and looking for ways to reduce labor costs without reducing headcounts. Without proper strategy and management on reducing labor costs, you can be left with less-than-optimal profits or worse debt.
Fortunately, there are some ways in which businesses can reduce labor costs in the construction industry. In this article, we discuss how businesses can reduce the overall labor cost in the construction industry.
Table of Contents
Why is reducing labor costs in construction necessary?
In the construction industry, more than 61% of the final sales price of a project goes into building costs. These costs generally include the cost of labor and materials. For most of the projects, it splits 50/50 between the cost of labor and materials, but for some projects, it can be up to 30/70.
The construction services industry keeps the gross margin close to 19%, but that’s on paper. Your profits can dip to a low if the costs of building the project are not appropriately managed. Little can be done about the building materials because you need materials to complete a project.
However, efficient management can lower labor costs without taking money away from your employees. Here are some ways to reduce labor costs for a construction project.
How to reduce labor costs in construction
Over the years, the construction industry has devised inventive and ingenious ways to reduce labor costs without sacrificing quality or cheating workers. Let’s take a closer look at how it’s done.
1. Estimate labor costs at the start of the construction project
Unless it’s your first construction project, you will have a good idea of what labor costs will be involved in the project. To provide an estimate, you must use your previous experience with similar projects as a benchmark.
You have to consider employee turnover and the increase in the cost of labor. You have two choices – a time and materials contract and a fixed-price contract for the project. In a time and materials contract, you calculate labor costs per hour, and the material prices are flexible and can increase or decrease depending on the project’s demand.
A fixed-price contract has a total value estimation for a set project. You have to deliver the project within the quoted price. While a time and materials contract pays more, as your client will pay the exact cost of the work based on labor rate and cost of materials, you can quote a higher price.
However, there is no structure to project completion here, and construction work progresses on the go. A fixed-price contract is more rigid, with well-defined documentation of specific phases and deadlines. Unless your project goes beyond the defined outline, the price won’t change.
Some construction business owners find it risky, but this type of contract has defined expectations, and it’s much easier to keep the project on track.
2. Review your site crew structure and see if you have the skilled workers for the tasks
In recent years the construction industry has been through a lot. First, the housing crisis of 2008 led to the loss of more than 2 million workers between 2007 and 2011. Then the global pandemic forced numerous construction businesses to suspend labor, close projects, and terminate employees.
All these events have highlighted the need for the correct site crew structure. Every construction business has a composite of employees. There are skilled and unskilled workers. Interestingly, many business owners do not understand how to reduce labor costs by giving the right task to appropriately skilled laborers.
You must review your site crew structure to ensure that the right people lead the teams. If you have put someone in the position of a supervisor who is better as a worker, consider providing them further training to make them better leaders. This is important to get quality work out of them.
Another critical aspect is ensuring your most skilled workers do what they do best. Don’t cut on paying them for their performance. It might sound counterintuitive; how can you reduce labor costs when you are spending more money?
You are missing the point of quality work. Suppose if one of the supervisors in your team is excellent at electrical work but spends more time overseeing lesser skilled workers, you might be losing money. Their electrical work, such as wiring and lighting, might need redoing.
Think about how much it will cost you to redo the entire work. This is why giving skilled workers the right job can help you reduce labor costs.
3. Streamlining your workflow schedule
In every construction business, it is essential to streamline the workflow. The hard part is how you facilitate the workflow schedule.
First, you must ensure that your work flowcharts are created with realistic goals and expectations. Second, workflow schedule charts must be well-defined. They must explain the nature of work and mention which laborer fits best in which subgroup.
The workflow schedule must also clearly define the time for each task to get completed. Match over the days’ progress of your construction crew with the workflow schedule chart. Discuss and ask for feedback from leaders to make the necessary changes to streamline the workflow schedule.
4. Go paperless
By digitizing documents such as workflow schedules and performance charts, you can make better decisions on reducing labor costs.
Going paperless allows you to stay on top of processes without visiting the site. Your supervisors don’t have to waste their time completing paperwork. There is no need to enter data into a system manually. With automation, you can easily track the construction project’s production at every phase.
Truein is an AI-powered face recognition time and attendance management software based on the cloud network. With this software, you can ensure workers are present on site through GPS and geo-fencing features. It tracks attendance in real-time, offers shift scheduling, and eradicates time punch errors. It enables you to pay laborers for hours they work accurately.
Being on top of material and subcontractor costs is not enough to make your construction business profitable. You have to manage labor cost-efficiently as it can take up to 50% of your revenue. We hope these tips will help you reduce labor costs.