Why Ryan Was Underpricing Construction Jobs (Without Realizing It)

The hidden labor costs that quietly eat away at construction profits.

Underpricing Labor Costs

After helping Ryan understand where profit was disappearing on his jobs, LyonBuilt started digging into another part of the business. At first glance, everything looked reasonable. Ryan estimated labor using the hourly wages he paid his employees. A carpenter making $32 per hour was estimated at $32 per hour. A helper making $22 per hour was estimated at $22 per hour. It seemed logical. After all, that's what showed up on payroll. But one question kept coming up:

If labor was estimated correctly, why did labor costs almost always come in higher than expected?

Ryan assumed the crews were taking longer than they should. Sometimes that was true. Most of the time, it wasn't.

Looking Beyond the Hourly Wage

When LyonBuilt reviewed the company's labor costs, we weren't just interested in hourly wages. We wanted to know what each employee actually cost the business. That's a much different number. An employee's paycheck is only one piece of the puzzle. 

Every hour worked also carries additional costs, including:

• Employer payroll taxes

• Workers' compensation insurance

• Paid time off

• Vehicle expenses

• Payroll processing

• Health insurance and benefits (if offered)

• Training, uniforms, and safety equipment

Those costs don't show up on a paycheck, but they're still part of what it costs to put someone on a jobsite.

One Small Difference Becomes a Big Problem

Ryan's lead carpenter earned $32 per hour. After adding payroll taxes, workers' compensation, vehicle expenses, and the company's other labor-related costs, LyonBuilt calculated that the true cost of that employee was closer to $46 per hour. That meant every estimate Ryan had prepared using $32 per hour understated his labor cost by roughly 44%. The crews weren't suddenly getting slower. The estimates were built on incomplete information.

At first, a $14 difference per hour doesn't seem like much. But construction businesses don't buy labor one hour at a time. They buy hundreds or even thousands of labor hours every month. On a project requiring 300 labor hours, underestimating labor by $14 per hour creates a difference of more than $4,000. Multiply that across dozens of jobs each year, and it's easy to understand why cash flow starts getting tight even when the schedule is full.

Ryan didn't have a labor problem. He had a pricing problem.

The Solution to Underpricing Construction Jobs

Once LyonBuilt established each employee's true labor cost, estimating became much more accurate. Instead of relying on wage rates, Ryan began estimating jobs using fully burdened labor costs. The company also started reviewing estimated versus actual labor hours on completed projects. That made it easier to spot trends, improve future estimates, and identify problems before they became expensive. The goal wasn't to make estimating more complicated - it was to make it more accurate.

Final Thoughts

Many contractors unknowingly price jobs using what they pay employees instead of what those employees actually cost the business. The difference can be thousands of dollars on a single project. If your company stays busy but cash always seems tight, labor burden may be one of the first places worth investigating.

Understanding your true labor cost isn't about charging more. It's about making sure every estimate reflects the real cost of doing the work.