The Hidden Costs: A Guide to Calculating Indirect Labor in Construction
In any construction project, it’s easy to budget for the direct labor—the carpenters, electricians, and operators actively performing specific tasks. But what about the "hidden" labor costs?
This is indirect labor: the essential work that isn't tied to a single billable task, but is critical for the entire project's support and success.
Failing to account for these costs is one of the fastest ways to destroy your profit margin. Here is a clear breakdown of how to identify and calculate them.
Step 1: Identify Your Indirect Labor Roles
First, list every role that supports the project without directly building it. Your list will vary, but common categories include:
Administrative & Management Staff: Project managers, supervisors, and administrative assistants who oversee operations, manage schedules, and handle paperwork.
Site Support Staff: General cleaning crews, security guards, and maintenance workers who keep the site safe, secure, and operational.
Quality Control (QA/QC): Quality inspectors and materials testing staff who ensure all work meets project standards and compliance codes.
General-Use Equipment Operators: An operator whose time supports the entire project rather than one specific task. For example, the operator of a site-wide forklift or a water truck for dust control.
Step 2: Determine the Fully-Burdened Labor Rate
This is the most critical step. Do not use the employee's simple wage. You must calculate their fully-burdened labor rate, which is the true cost of that employee to your company.
Consult your accountant to get this number, which should include:
Base hourly wage
Payroll taxes (e.g., FICA, FUTA/SUTA)
Workers' Compensation insurance
Health insurance and benefits
Paid Time Off (PTO), vacation, and holiday pay
Retirement plan contributions (e.g., 401k match)
An employee who earns $30/hour in wages might actually cost your company $45/hour or more. Using the $30 wage in your estimate guarantees you will lose money.
Step 3: Calculate the Total Indirect Labor Cost
Once you have your list of roles and their correct fully-burdened rates, the calculation is straightforward.
Track the Hours: Track or estimate the number of hours each indirect labor category will contribute specifically to the project.
Multiply: For each category, multiply the projected hours by the fully-burdened hourly rate.
Sum the Totals: Add all the costs together to find your total indirect labor cost.
Example Calculation (per Week)
Let's use hypothetical fully-burdened rates for a project. (These values will vary significantly based on your region and company).
Project Manager: 40 hours/week @ $75/hr = $3,000
Administrative Assistant: 40 hours/week @ $35/hr = $1,400
Quality Control Inspector: 30 hours/week @ $60/hr = $1,800
Security Officer: 20 hours/week @ $40/hr = $800
Support Staff (Total): 80 hours/week @ $28/hr = $2,240
General Operator: 50 hours/week @ $50/hr = $2,500
Total Weekly Indirect Labor Cost = $3,000 + $1,400 + $1,800 + $800 + $2,240 + $2,500 = $11,740
This calculation gives you a comprehensive and accurate view of your true indirect labor expenses. By including this total in your bid, you ensure that these essential costs are covered, protecting your project's profitability from day one.
