How to calculate construction costs? A guide to navigate materials cost, labor cost, administrative cost and beyond

Embarking on a residential construction project requires a comprehensive understanding of construction costs. This guide delves into the intricacies of construction expenses, covering everything from material and labor costs to the often-overlooked factors like administrative costs, contingencies, and mobilization expenses. Explore the nuances of construction estimating software to enhance accuracy and efficiency in budgeting.

Whether you're a homeowner or a professional, this guide equips you with the knowledge to navigate residential construction costs effectively and ensure the success of your project.

The multiple layers of construction costs

Embarking on a residential construction journey requires a thorough understanding of the various costs involved to complete a job. In this guide, we'll break down the process of how to calculate construction costs.

As you start estimating jobs and calculating construction costs, you will want to make sure you keep the following construction costs categories in your analysis:

  • Material costs: rough materials (concrete, wood, drywall boards etc), and finishes (fittings, tiles, paint, windows, etc.)
  • Labor costs: employees wages (incl. uffer for overtime), subcontractors costs
  • Mobilization costs: heavy equipment, site preparation, waste containers, etc.
  • Administrative costs: travel, project management, fuel
  • Contingencies: waste, delays, unexpected costs variations
  • Capital cost: interest from loans for working capital for example

Material Costs: How to calculate construction material costs?

Material costs encompass more than just the basic building blocks. 

For each project, you want to make sure that you’ve gathered the right quantities of materials, their cost per unit. There’s a diverse range of construction materials and their quality will influence your budget.

General contractors separate rough materials (structural wood, concrete, drywall boards, plaster etc) from finishes (tiles, paint, fittings, windows). For rough materials, you want to have 3-4 options of dedicated suppliers with whom you’ve built a strong network that can provide you discounted prices for your loyalty. 

For finishes, the selection is quite large and sometimes customers will want to do the shopping themselves. 

Whether it’s rough or finished materials, you want to make sure you include a buffer in the calculation of quantities of 5-10% in order to account for wastes or unusable cuts for example.

Labor Costs: How to calculate labor cost in construction?

Under labor costs, you can consider employee wages and subcontractors costs.

For an early residential construction company, you want to have 2-3 employees that can cover the following functions: estimating, project management, carpenters, framing, demolition, painting and general work. 

In order to calculate labor cost in construction for your employees, you need to know their hourly rate and also how much time a certain task will take. Labor hourly rate in construction are often regulated depending on your State or Province. In regards to how long it takes to complete a certain task, you will either need to have experience or ask someone with experience or you can simply use a construction estimating software like Billdr PRO.

For specialized work, you will need to rely on subcontractors such as plumbers, electricians, excavators, HVAC, landscapers, stone masons. We advise you to request 2-3 quotes from different subcontractors before making a decision.

Mobilization Costs: how to calculate mobilization costs?

Mobilization costs are often underestimated but are crucial for a successful start to your project. It is essential that you list them out because they will eat considerably into your profitability if you ignore them.

We list below some common items to include in your mobilization costs:

  • Heavy equipment: you will need to rent a truck, pressure washer, generator, bobcat
  • Waste container: you will often need to rent a waste container for all the demolition
  • Trash chute: if you’re doing a job on multiple levels you’ll benefit from a trash chute so you don’t have to go up and down all the time to put waste in a container
  • Site preparations: you will often need to protect floors or walls or existing objects
  • Special conditions: if you work in asbestos conditions, it’s high risk and you might need a change room or decontamination SAS 

Administrative Costs: Behind-the-Scenes Essentials

Administrative costs are the backbone of any construction project. Understanding and planning for these costs ensures a smooth and legally compliant construction process.

In this category you can include the following costs:

  • Permits and fees: if you have to apply for construction permits on behalf of your customer for example
  • Insurance costs: you will have to insure your company with a general liability insurance, and also insure your employees in case of personal injury
  • Project management costs: you will either spend time managing the project, or have a secretary handling the client relationship in the back office, plus the travels to the site or stores for materials

Too often residential general contractors do not value their time enough. If you spend time managing a project, you should charge the customer for the time spent off the construction site that requires you to do the administrative work such as: sending advancement reports / updates to your customer, sending invoices to customer & tracking payments, sending invoices to your accountant, tracking inventory of materials and purchases made, tracking employees time, tracking invoices & payments to subcontractors, etc. It takes a lot of time to do all these things well so you should make sure as a general contractor to take that time into consideration in your costs. As a rule of thumb it’s likely that administrative costs are around ~ 10 to 15% of the project size.

Contingencies: Budgeting for the Unexpected

No construction project is immune to unforeseen challenges. It’s important to include a buffer for contingencies in your budget in order to have a financial cushion for unexpected events or changes in project scope.

Any experienced project managers in construction know that things don’t go as planned in 90% of cases: a customer will be late to select finishes, a supplier does not deliver materials on time, as general contractor you might forget to provide clear instructions to your subcontractors, etc.

As a rule of thumb, you want to include ~ 5% buffer as a contingency in your construction costs.

Construction Estimating Software: A Technological Edge for construction costs

In the digital era, leveraging construction estimating software is a game-changer as a residential general contractor.

Equipping your construction business with a construction software like Billdr PRO will automate & structure your work around calculation construction costs as discussed in this blog. You can also use a construction estimating template if you’d like to work with Excel.

In addition, Billdr PRO provides you an all-in-one platform that helps you manage all of your construction business under one screen: 

  • sales & client management: Billdr PRO stores all your clients information in one place, your leads and status of each potential client
  • Contract management: Billdr PRO provides you all the project management tools for a well organized execution within your team thanks to change orders, schedule, multiple users, client dashboard, to-do lists, etc
  • Team management: Billdr PRO provides you with timesheets, clock-in clock-out, multiple users experience, and other tools to help manage your team
  • Financial management: Billdr PRO helps you manage budgets, track your expenses and profitability, synchronize all your data with Quickbooks

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