If you are in the construction business, you know that there is a never-ending list of details to keep track of.
Labor and material costs can be two of the biggest stressors, but they don’t have to be.
In this guide, we will cover how to calculate labor and material costs and why they are essential for accurate budgeting.
If you are looking for the easiest way to manage your labor and material costs, look no further.
Flexbase offers a holistic cash flow management solution for construction companies just like yours.
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Plus, we can quickly and easily walk you through each and every detail of labor and material contracts.
“Labor and materials,” also known as time and materials, is a phrase in a construction contract in which an employer agrees to pay the contractor based on the amount of time spent by the contractor’s employees to perform the work and for the materials used in the project.
The ability to grasp the difference between material cost and labor cost is an essential key to both budgeting well and making a profit.
While labor and material costs are two very different entities, they share several similarities.
Both labor and material costs:
Labor cost may be affected by:
Because labor cost is more flexible than materials cost, labor is often targeted first if and when budget cuts may be needed.
Material cost can be influenced by:
Direct labor refers to anyone directly involved in the construction project.
This includes the cost of wages and benefits for employees including the:
Direct labor cost will be figured by determining how much it costs per day to have each employee on the job.
This number will then be multiplied by how many days the job will potentially take.
When figuring the direct labor cost of a construction project, it is important to include not only the hourly wage, but also:
The cost for subcontractor labor will need to be considered in the total as well.
Material cost includes all the tangible items that go into the finished product.
When calculating material costs, both indirect and direct materials will be taken into consideration.
Direct material includes things such as:
Indirect material includes items like:
The cost for any equipment that you will need to lease should also be factored into the materials cost.
In addition, some contractors will choose to include the cost of materials delivery and potential wastage in their material costs totals.
It is important to calculate all labor and material costs and list them in detail to protect the ability to place a mechanic’s lien — should the need arise.
A mechanic’s lien is a legal claim against a construction project that ensures the right of the filer to seek unpaid compensation.
The lien is generally filed by contractors, subcontractors, or suppliers when they have not received a timely payment for completed work or for materials they provided for a construction project.
Since the mechanic’s lien claim must be able to clearly identify the labor and material provided by the claimant, proper attention to detail when making this calculation is critical.
The scope of the descriptions required for the filing of a mechanic’s lien can vary from state to state, but most states require a description of labor and material to verify that the claimant supplied them for the construction project.
Since the filing of a lien is time-sensitive, a claimant can potentially miss a deadline and lose their lien rights if their claim is rejected.
For this reason, it is critically important to have all labor and material costs properly documented and calculated ahead of time.
If you are employed in the construction industry, having a Labor and Material Bond can make a huge difference. Below we take a closer look at Labor and Material Bonds.
Also referred to as a Payment Bond, a Labor and Material Bond is a form of insurance that protects the owner from a mechanic’s lien claim or any other type of claim against the property title for non-payment.
In addition, it protects the suppliers and subcontractors by ensuring that they will receive payment for the work they have done.
To bid the job, a Labor and Material Bond generally starts with a Bid Bond. Once the job has been awarded to the winning bidder, the bond will then be required as a security in order to ensure the job’s completion.
The Labor and Material Bond forms a three-way contract between the contractor, the owner, and the surety, to ensure that all subcontractors, laborers, and material suppliers will be paid — leaving the project lien-free.
Labor and Material Bonds are required on most public projects, and they are frequently required on conduction projects by private owners as well.
If the general contractor neglects to pay subcontractors or suppliers promptly, the subcontractors and suppliers are entitled to make a claim against the Labor and Material Bond.
Labor and Material Bond claims are filed in place of mechanic’s liens, which, as a rule, can not be placed on public property.
Why is a Labor and Material Bond helpful?
Here are a few of the main reasons:
The average cost for a Labor and Material Bond will vary from contract to contract, but is typically less than 1% of the contracted price.
However, if the contract price is under $1 million, the premium may be between 1% and 2%.
When determining the rate for a Labor and Material Bond the following factors are taken into account:
A Labor and Material Bond may be required on many public-funded construction projects and the Labor and Material Payment Bond form can be found at the US General Services Administration website.
The application asks for the penal sum of the bond as well as the full legal name and address of the:
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