AACE International Chapter 4 – Labor

Chapter 4―Labor
Morris E. Fleishman, PE CCP FAACE

Abstract
Labor is one of the most important resources for a project. An owner, employer, or project manager from any industry needs to
have a complete understanding of how the labor force works. This chapter provides an overview of the different classifications of
labor, the different types of labor wages and benefits and also indirect and overhead labor and other costs. This chapter also
illustrates the procedure to estimate the work hours for a given work scope at a given location; and how the labor hours can be used
to monitor the progress of work.

Keywords
Direct Labor, Indirect Labor, Labor Rates, Labor Wage, Overhead Labor, and Performance Monitoring.

INTRODUCTION
As an owner, employer, project manager, estimator, etc., you will have work tasks that your workers need to complete. As such, you
need to know how much this will cost. You also need to know how to set up and monitor the effort to ensure you are getting the
desired work product, in the timeframe required, for a price you can afford. In order to do this, you need to understand the cost
factors that affect this work and the techniques used to monitor progress.

Learning Objectives
After completing this chapter, the reader should be able to:

 Identify different classifications of labor and how each contributes to the completed project.
 Develop labor rates for estimating.
 Develop and use weighted average rates/composite crew rates.
 Include indirect and overhead labor and other costs.
 Estimate work hours for a given work scope at a given location.
 Use labor hours to monitor work progress.

LABOR CLASSIFICATIONS
The following definitions were taken or adapted from AACE International’s Cost Engineer’s Notebook [1].

 Direct Labor―The labor involved in the work activities that directly produce the product or complete the installation
being built.
 Indirect Labor—The labor needed for activities which do not become part of the final installation, product, or goods
produced but that are required to complete the project.
 Overhead Labor—The labor portion of costs inherent in the performing of a task (such as: engineering, construction,
operating, or manufacturing), which cannot be charged to, or identified with a part of the work, and therefore must be
allocated on some arbitrary basis believed to be equitable, or handled as a business expense independent of the volume
of production.

Table 4.1 provides examples of different labor classifications and costs. The examples are not all-inclusive and only serve to illustrate
the elements of each type of labor.

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Table 4.1―Examples of Labor Costs

Cost Type Direct Labor Indirect Labor Overhead labor

Construction Carpenters, General Foremen, Construction Home Office Support: Legal
Electricians, Management, Field Purchasing, Field Assistance, Procurement,
Ironworkers, and Warehouse Personnel, Payroll Human Resources, Senior
Foremen working on Personnel, Jobsite Computer Management Review,
the project Support, Project Cost Engineers and Corporate Computer Support,
Schedulers, etc. Estimating and Business
Development, etc.
Manufacturing Plant Equipment Plant Accountants, Maintenance Corporate support: Legal,
Operators, First Line Personnel, Purchasing Personnel, Human Resources, Computer
Foreman, Supervisors, Security, Plant Supervision, Support, Corporate Finance
etc. Warehouse Personnel, Production and Accounting Support,
Planning and Cost Personnel, On-site Sales, etc.
Computer Support
Engineering Civil, Mechanical, Documentation Support – Corporate Support: Human
Electrical, duplicating and record keeping, Resources, Computer Support,
Instrumentation and Engineering Cost and Scheduling Corporate Accounting
Controls Engineering Personnel, Project Supervision Support, Estimating, Business
and first line Development, etc.
supervision

The difference between indirect and overhead labor appears to be somewhat vague. Depending upon the size of a project, plant, or
office, and the location, some elements could shift from indirect labor to overhead labor, and there may be instances where direct
labor moves to indirect labor and overhead labor as well.

For example, if the construction project is small, payroll and accounting may be located offsite and be composed of personnel who
are splitting their time between several projects at different locations. In this instance, this function could be an indirect or an
overhead. Therefore, it is imperative that the estimator and/or cost engineer understand where within his project, industry, and
company, each of these costs are included, so that they can be correctly estimated and included in the estimate and budget.

DEVELOPING LABOR RATES

Base Wages
Base wages is the amount that goes directly to the employee. The source of these wage structures can be found in data bases from
previous projects, labor contracts, unit rates supplied by contracting and engineering firms, local chamber of commerce data,
government labor statistics, published labor data bases, and standardized estimating publications, such as Means and Richardson [4-
7].

Base wages are usually calculated on a per hour basis; however, it can also be a breakdown of a weekly or monthly base salary
prorated to a daily or hourly rate. The reason for an hourly breakdown is that estimates are usually developed based upon the
amount of work hours to complete. Therefore, the labor cost rates need to be developed on a comparable basis.

If one is costing out craft labor, their pay rate is usually given in hourly increments. Supervision, support staff, engineering, etc.,
often are paid on a weekly, bi-weekly, or monthly rate. This rate can also be broken down to an hourly rate for estimating and
payroll purposes.

The following are examples of base wages:

 Craft personnel―$27.00 per hour

 Supervision―$1,400 per week divided by 40 hours/week = $35.00 per hour and
 Engineering―$80,000 per year divided by 2,080 hours/year = $ 38.46 per hour

NOTE: 2,080 hours = 5 days per week @ 8 hours per day for 52 weeks

The examples above can be used to calculate the direct amount that each employee will earn and be paid for each hour worked.

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Fringe Benefits

Paid Time-Off (PTO) ― Most employees have additional benefits of time off for local and national holidays, vacation, sick time, etc.
Therefore, in developing a unit cost for labor, a factor is added to increase the estimated and booked cost per hour worked each
week to cover PTO. Most companies transfer this money to a special fund to be used when an employee takes paid time off. In the
case of construction craft, that may work for many employers during a given period, the funds are usually paid into a fund managed
by their union or trade organization and they pay out the salary for PTO.

Example:
An engineer gets 5 days of sick time, 10 days of vacation, and 10 holidays per year with a base salary of $38.46 per hour.

Adders are: Sick Time: 5 days @ 8 hours /day @ $38.46 = $1,538 per year
Vacation: 10 days @ 8 hours /day @ $38.46 = $3,077 per year
Holiday: 10 days @ 8 hours /day @ $38.46 = $3,077 per year
Total $7,692 per year

This engineer is now working 2,080 hours (52 weeks x 40 hours per week), less 25 days @ 8 hours or 200 hours for paid time off; so
productive time is 1,880 hours.

The hourly cost is $38.46 base wage

+ $4.09 PTO adder ($7,692 divided by 1,880 hours)
Total = $42.55

Medical and Life Insurance Benefits―Some firms and labor contracts include contributions to a medical and life insurance program.
These are usually calculated on an hourly, weekly, or monthly cost basis and added to the per hour work cost.

If the company that employs the engineer, in the example above, contributes $500 per month for medical and other insurances, the
following should be added to the hourly costs:

$500/month x 12 months = $6,000/year divided by 1,880 hours = $3.19 per hour

Furthermore, if the company also contributes $400 per month to a 401k plan (a U.S. recognized company retirement plan) and/or
any other retirement plans for the engineer, the following should be added:

$400/month x 12 months = $ 4800/year divided by 1880 hours = $2.55 per hour

Government Mandated Benefits:

These benefits include items such as: government retirement funds, unemployment insurance, retirement healthcare insurance, etc.
In the U.S., these funds include Social Security, Medicare, state unemployment insurance, etc.

These costs are usually calculated on a straight percent of the worked hours. Continuing with our example engineer, we will add the
following:

Retirement (6.2%) = .062 x $38.46 = $ 2.38

Retirement Medical (1.45%) = .0145 x $38.46 = $ 0.58
State Unemployment (1.0%) = .01 x $38.46 = $ 0.38
Total Government Mandated Benefits = $ 3.34

Summary of Engineer’s Wages Example

The cost basis for an Engineer who makes $80,000 is summarized in Table 4.2:

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Table 4.2—Example Labor Costs for an Engineer

Per Hour
Base salary (1,880 hours/year) = $38.46
Fringe Benefits:
Company Retirement Contributions = $2.55
Paid Time-Off (Holidays, vacation, sick time) = $4.09
Company Medical & Life Insurance = $3.19
Government Mandated Benefits (Retirement, etc.) = $3.34
Total Fringe Benefits (per hour) = $13.17

Total Costs (per hour) = $51.63

Benefits Adder = $13.17/$38.46 = 34.2%

Engineering/Contractors Overhead and Profit

The calculations in Table 4.2 will apply for the direct hire of individual workers. When hiring contract employees, or estimating an
engineer’s or contractor’s costs, labor rates are usually broken down differently. The breakdown includes the following:

 Base wages, including fringes;

 Worker’s compensation, (if applicable);
 Overhead; and,
 Profit, (if applicable for time and material situations).

In these instances, the vacation, sick time, retirement contributions, and medical contributions are included in the fringe benefits.
Worker’s compensation is a direct government rate. Overhead will apply to the home office cost of administration, payroll, billing,
etc. Profit usually only applies to approved time and material charges. The negotiated contract determines each of these costs.

RS Means, for example, includes a table of average rates for various types of contractor personnel including overhead and profit in
their manual, Concrete & Masonry Cost Data 2007 [7]. These labor rates are based upon a survey of union rates in 30 cities. Similar
information is available in the Engineering News Record (ENR) magazine and online.

Fully Loaded or Billing Rate

A fully loaded rate is the base wage, plus adders that will be paid for an hour’s work on the job. An owner employing a contractor on
a time and material basis only pays for the worker’s time when he or she is on the job. If he or she is sick, on vacation, or it is a
holiday, the contractor cannot bill the owner. However, the payment rate charged usually includes funds to cover this paid time off.
The contractor either places the funds in a separate account for use when the worker is off; or, if the worker is in a union, the union
may get the funds to disburse when the worker is off. All estimates relating cost of labor to work performed are usually calculated
using the fully loaded rates.

Overtime Wages
There are many different overtime wage situations and there are several aspects that need to be evaluated in developing an
overtime wage structure. Overtime can range from straight time pay for the additional hours, beyond the standard workweek of 40
hours, or 8 hours per day, to 1.5 and 2.0 times the regular pay.

When developing the overtime formula, the estimator needs to make sure that those benefits that are only charged on an 8 hour
day, or 40 hours per week, are not added to the overtime pay rate. Benefits such as PTO, some insurance, and some governmental
funding programs, may be included in this category. Government funded retirements, such as Social Security and Medicare, are
calculated as a percentage of the wage and should be added to the overtime rate. The estimator needs to confirm what needs to be
added for the specific work area where the project is located, in order to develop the correct rate. See the example in Table 4.3:

Table 4.3 – Overtime Wage Rate Calculation

Per Hour
Craft worker earning = $27.00
Working overtime (1.5 times the base rate) = $40.50
(PTO, Company insurance, and State unemployment adders are
not included)
Federal retirement and medical (included at 7.6%) = $3.10
Total cost per hour (1.5 time OT) = $43.60

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WEIGHTED AVERAGE RATES/CREW COMPOSITE RATES

Most estimates are for groups of workers who have a variety of backgrounds, years of experience, etc. In the craft area within each
craft you could have a range of apprentices to journeymen at the top step of the wage ladder, based upon their training and years of
experience. The same applies in the engineering ranks as your team mix will have beginning engineers right out of school,
engineering aides, registered engineers, senior engineers, etc. Since estimators do not know who will be part of the actual team,
they must make some assumptions in order to develop a comparable base wage rate to use. In most cases they will build a weighted
average team, see Table 4.4.

Table 4.4―Weighted Average Examples

Civil Engineering Design Team
Number Classification Hourly Base Wage Extension
2 Engineering Aides $18.00 $36.00
2 Junior Engineers $25.00 $50.00
4 Engineers $35.00 $140.00
2 Senior Engineers $40.00 $80.00
1 Engineering Supervisor $48.00 $48.00
11 Total $354.00
Average cost for the group $354.00/11 = $32.18/hour
With benefits adder of 34.2% $43.19/hour
Composite Concrete Crew – Normal Time (40 hours/wk)
Number Classification Hourly Base Wage Extension
2 Laborers $25.00 $50.00
4 Carpenters $26.50 $106.00
2 Cement Masons $26.00 $52.00
1 Ironworker $26.50 $26.50
1 Foreman $32.00 $32.00
10 Total $266.50
Average cost for the group $266.50/10 = 26.65/hour
With benefits adder of 30% (assumed) $34.65/hour
Composite Concrete Crew – Overtime (1.5 times normal wages over 40 hours/wk)
Number Classification Hourly Base Wage Extension
2 Laborers $25.00 x 1.5 $75.00
4 Carpenters $26.50 x 1.5 $159.00
2 Cement Masons $26.00 x 1.5 $78.00
1 Ironworker $26.50 x 1.5 $39.75
1 Foreman $32.00 x 1.5 $48.00
10 Total $399.75
Average cost for the group $399.75/10 = 39.98/hour
With benefits adder of 7.65% $43.04/hour
Composite Concrete Crew – Double Time (2 times normal wages over 40 hours/wk)
Number Classification Hourly Base Wage Extension
2 Laborers $25.00 x 2.0 $100.00
4 Carpenters $26.50 x 2.0 $212.00
2 Cement Masons $26.00 x 2.0 $104.00
1 Ironworker $26.50 x 2.0 $53.00
1 Foreman $32.00 x 2.0 $64.00
10 Total $533.00
Average cost for the group $533.00/10 = 53.30/hour
With benefits adder of 7.65% $57.38/hour

Example Calculation:
A contractor needs to make up time in the schedule. If the contractor works the concrete crew, shown in Table 4.4―10 hours per
day, Monday through Saturday for two weeks, how much extra will it cost the contractor?

Overtime is paid for all hours over eight Monday through Friday, and the first eight hours on Saturday.
Double-time is paid for hours greater than eight on Saturday and all Sunday work.

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Monday through Friday @ 2 hours per day = 10 hours of 1.5 time pay
Saturday = 8 hours
Total 1.5 time pay = 18 hours
Saturday double time pay = 2 hours

Crew Cost (1.5 times) = $43.04 / hour x 10 workers x 18 hours x 2 weeks = $15,494
Crew Cost (double time) = $ 57.38/hour x 10 workers x 2 hours x 2 weeks = $2,295
Total = $17,789
Normal time cost if no OT worked
$34.65/hour x 10 workers x 20 hours x 2 weeks = $13,860
Additional cost to work overtime = $3,929

Special Direct Labor Estimating Adjustments

Commercial estimating databases are composed of composite data that reflect costs and productivity for individual locations,
industries, etc. However, some industries such as nuclear or individual plants or projects may require additional nonproductive or
“non-wrench turning” activities, which cause their labor costs to increase. Examples of these situations include the need to respond
to increased or unique regulatory requirements, special safety requirements, individual plant operational issues, etc. Example
responses include: additional instructional meetings, supplemental training, and increased turnover times to comply with industry
and plant or project unique situations. Therefore, when using a commercial database, you need to add an adjustment in order to
properly align estimates and budgets with these unique requirements. The following is an example of how to determine adjustment
factors to use in estimating work hour requirements in these situations:

Example:
In response to a need to improve project safety, Company A has instituted a weekly one hour safety meeting, and increased
turnover meetings by 15 minutes at the beginning of each shift. A review of the commercial industry work hour database that
Company A uses reveals that none of these activities are included in their commercial estimating database that they use.

The project is currently working a five day, 40 hour per week schedule.
Estimated work hours to set forms for Foundation B = 150 work hours

Additional meeting time: Safety meeting = 60 minutes

Turnover time increase
@15 minutes x 5 days = 75 minutes
Total increase = 135 minutes/60 minutes/hour = 2.25 hours/week

Adjustment = 2.25/40 = 5.6% or 6% rounded

Thus, six percent needs to be added to all required work hour calculations
The adjustment for setting forms for Foundation B = 150 hours x 1.06 = 159.0 hours required

Extended overtime and some shift work may lead to additional productivity reductions. Extended overtime is usually considered
after two weeks, as fatigue can become a productivity factor. Also swing and night shifts may also have productivity impacts. Local
and company historical data should be used to determine if additional adjustments need to be considered in developing labor
estimates. Adjustments will usually result in adding a percentage productivity adjustment, similar to the example presented above.

INDIRECT AND OVERHEAD LABOR

The previous examples have shown how to determine wage rates and how to use them to develop an estimate for the direct portion
of the work. However, a complete estimate needs to include indirect and overhead labor and other costs as well. Overhead and
indirect positions were discussed at the beginning of this chapter and were illustrated in Table 4.1.

There are two methods of determining these costs that will be addressed here. The first method is to do a direct estimate of the
indirect staff required and cost them out the same way as the direct work crews.

For example, if we were building a manufacturing facility that will take a year, the indirect support could consist of the personnel
listed in Table 4.5, using wage rates determined by methods explained earlier:

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Table 4.5― Example of Indirect Labor for a Facility Project

Indirect Positions Duration on No. of Worker Monthly Estimate
site (months) positions months Rate*
Warehouse workers 12 2 24 $3,800 $91,200
6 2 12 $3,800 $45,600
Accounting clerks 12 1 12 $4,800 $57.60
6 1 6 $4,800 $28,800
Payroll supervisor 8 1 8 $5,500 $44,000
First aid person 12 1 12 $6,000 $72,000
Safety engineer 10 1 10 $7,000 $70,000
Office manager 12 1 12 $7,500 $90,000
Clerical support 12 1 12 $4,000 $48,000
6 1 6 $4,000 $24,000
On-site IT support 11 1 11 $7,000 $77,000
Project manager 10 1 10 $10,000 $100,000
Total Indirect Labor $748,200
* Includes benefits

As shown in Table 4.1, a manufacturing facility or power plant will have the same kinds of functions that will be included in their list
of indirect labor positions.

The second method will be to use historical job percentages to determine an appropriate allowance for indirect labor. Typical
examples would include applying a percentage of direct labor, based upon historical data, or applying a percentage of the total
direct costs for indirect labor, material, and other costs.

Example: Estimated Direct Costs = $360,000

Indirect Costs @ 25% = $90,000 (25% is from company historical data)
Or,
Estimated Direct Labor = $250,000
Indirect Labor @ 30% = $75,000

In the second example, material and other indirect costs would have to be estimated separately. The choice of methods will depend
upon how much detailed information is available for the estimator to use in developing the estimate.

Overhead Labor
While indirect costs are often located at the plant or jobsite, overhead personnel are more likely to be located at a corporate facility,
which is physically separate from the manufacturing facility or construction site. These personnel usually work on many different
projects for their company at the same time, or just spend short periods, days or weeks, on each project. Examples of these kinds of
positions were included in Table 4.1.

For early estimates, the general methodology is to apply a percentage factor to either direct costs, direct labor costs, etc., as
determined by corporate historical data, to develop the overhead estimate. This method can be used for more detailed estimates as
well. A detailed estimate for overhead labor can also be developed using number of persons, similar to the indirect labor estimate
already illustrated. It is up to management and the estimators to determine which method will supply them with the estimate
accuracy they need.

ESTIMATING WORK HOURS TO COMPLETE A GIVEN WORK SCOPE

Estimating work hours is usually not done in detail until enough scope information is available to do at least a Class 3 estimate. A
Class 3 estimate, as defined by AACE International1, is a project on which the major equipment has been identified, layout drawings
are available, and rough quantities can be estimated for many of the major elements (such as cubic yards of concrete, linear feet of
pipe, etc.). Class 2 or Class 1 estimates would have more detailed unit information, as more of the final drawings would be available.
With this kind of information available, the estimators will group these quantities into appropriate work packages, and collaborate
with the schedulers to begin the development of the work package sequence. They can then estimate the labor costs by multiplying
work hours, from their databases, with the identified quantities. It is critical to do this so that overall staffing requirements over the
project duration can be used to confirm the sum of the individual work package requirements.

The AACE classification ranges from least detailed, a Class 5 estimate, to most detailed, a Class 1 estimate; in which all drawings and
specifications are completed as outlined in AACE International Recommended Practice 18R-97, Cost Estimate Classification System
for Process Industries [3].

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Work Package Development (or Work Breakdown Structure―WBS)

The first step is to review the project and develop meaningful work packages. Often, several summary level estimates are completed
before enough of the project is designed to provide the estimator with detailed quantities of material, so that a detailed labor
estimate can be developed. An example of a WBS for construction of a small manufacturing facility consisting of a main building,
warehouse and office building, and site work area including entrance roads and utilities, is shown in Table 4.6.

Table 4.6―Example WBS for a Small Facility

Level 1: ABC Manufacturing Plant
Level 2: Site Development Main Building Warehouse
Level 3: Roads Foundation Foundation
Utilities Excavation Excavation
Water Base fill (gravel) Base fill (gravel)
Gas/electrical Concrete Concrete
Sewerage Structural steel Structural steel
Lighting Building walls Building walls
Parking lot Building roof Building roof
Building interior Building interior
Building lighting Building lighting
Building (utilities) Building (utilities)
Equipment (installation) Office furniture
Equipment (cost) Warehouse equipment
Electrical
Piping

As seen in Table 4.6, the work hour estimates will be done at the Level 3. We will use the main building concrete foundation as an
example.

 The building is 300 ft. (m) x 100 ft. (m);

 The concrete foundation consists of wall footings, foundation walls, and a slab;
 The slab will be our example, and it is 1 foot (meter) thick; and,
 The quantity of concrete in the slab is: 200 ft. (m) x 100 ft. (m) x 1 ft. (m) = 20,000 Cubic Ft (Cubic Meters) = 741 CY (CM).

Determination of the work hours required is done by consulting a reference database to determine how many hours it has taken
historically to complete a foundation slab of this type. There are multiple places to obtain this data, including company historical
data for projects on this site or in the area, a commercial estimating database, Means, Richardson, etc.

For example, the database you are using indicates that to place this slab it will take:

0.026 labor hours/m2

For this example:

20,000 m2 x .026 labor hours/m2 = 520 labor hours

In this example, measurements are in feet or meters and are designated by ft (m) (feet/meters), sf (m2) (square feet/meters
squared), etc. Please note that this example uses 0.026 labor hours for both sf and m2 solely so that the numbers stay the same.
There was no attempt to convert hours for sf to hours for m2.

Costs to Support the Worker

The costs above include only the direct work required to place the slab. The assumption is that all of the material is on hand, the site
is prepared, and the crew is ready to start work. The reality is that the costs need to include many items and support personnel that
allow the workers to perform their tasks. In addition to indirect and overhead labor, the following examples further illustrate other
indirect and overhead costs.

Construction indirect costs and overhead costs can include items, such as storage and fabrication facilities, lunch and rest room
facilities, tool rooms, etc. Manufacturing indirect costs could include warehouse space, administrative offices, rest rooms,
lunchrooms, locker rooms, raw material loading and unloading facilities, etc. Engineering indirect costs could include duplicating
facilities, computer facilities, administrative offices, and personnel, etc. When doing a conceptual, or Class 4 estimate*, these will
normally be added as a percentage or allowance. When doing a budget, control, or Class 2 estimate*, these costs will be estimated
in detail. When dealing with a less detailed estimate, often these support costs are estimated by adding a historical factor to the
direct work estimate to provide for these necessary personnel and activities.

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* Note: Estimate classifications are from AACE International Recommended Practice 17R-97, Cost Estimate Classification System,
Revised November 29, 2011 [2].

Factors Affecting Productivity

Most estimates are developed from a common database that equates so much work done for so many work hours expended. In the
petrochemical industry, common indices are based upon, “U.S. Houston-Gulf Coast” production. These rates are then adjusted for
conditions at the jobsite under review. The following is a typical, but not all-inclusive, list of items that each estimator needs to
review to determine if they affect the job and the estimate:

 Will union or non-union craft labor be used?

 Is sufficient labor available locally, or will workers have to come from a long distance away?
 If area is remote, do workers have to be bused in?
 What will the weather conditions be like? (hot, cold, rainy, etc.).
 Are there any local holidays?
 Are temporary living quarters needed?
 Is overtime necessary to attract workers?
 What are the standard work hours and work days?

The Richardson Estimating System suggests adjustments to their rates for the following (3, p. 1-2):

Jobsite Conditions Good + 3% to 5%

Average + 6% to 8%
Poor + 9% to 15%
Worker Skill Level High + 2% to 5%
Average + 6% to 10%
Poor + 11% to 20%
Temperature Below 40 degrees F (4.4 degrees C) or above 85 degrees F (29.4 degrees C)
add 1% per degree of variance
Work Weeks in excess of 40 hours
41 to 48 hours + 5% to 10%
49 to 50 hours + 11% to 15%
51 to 54 hours + 16% to 20%
55 to 59 hours + 21% to 25%
60 to 65 hours + 26% to 30%
66 to 72 hours + 31% to 40%

*Richardson Process Plant Construction Estimating Standards, Volume 1, Page 1-2, Copyright 2007.

Example Calculation:
The standard labor cost for 100 LF (M) of footing 8 inches (cm) by 12 inches (cm) = $743.30*
*Richardson 2007, page 7, section 3-1.

The jobsite conditions are:

Adders
Jobsite conditions Good 4%
Worker Skill Average 8%
Temperature 95° F 10%
Work week = 40 hours 0%
Total adders = 22%

Unit Rate [100 LF (M)] = $743.30 x 1.22 = $906.83

Productivity Improvements
The discussion above was meant to make the reader aware of various conditions that affected both the cost and schedule duration
of the project.

Learning Curve―One of the most important items affecting the learning curve is the productivity improvement that results from a
crew performing repetitive type operations. In a manufacturing environment, or a construction project where similar kinds of work
are done, the more the crew does the work, the faster and more efficient they become as they gain familiarity of working together,
using the tools, possibly fabricating special tooling to make the work easier and faster, etc. This needs to be encouraged and
factored into any budget or estimate made.

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Examples of Other Types of Productivity Improvements―While it is one thing to recognize existing factors, there is also the
opportunity to put in place procedures or make changes to improve productivity and minimize the cost of some of these factors. For
example, to shorten waiting time for a crew, material may be pre-staged at the work location, stored on trailers which can be easily
moved to the work site, fabricated in sections, and assembled at the work site, etc. To minimize the impact of adverse weather,
temporary shelters can be built which provide shelter from the elements. Using portable tool sheds, which can be moved around to
various locations as the work progresses, can shorten the time required to pick up tools. In addition to these physical actions, there
is a whole series of actions, including training and team building, which can be used to improve communications and working
relations between the various crews and personnel on a site. A manufacturing plant has the added benefit of more permanent
personnel and the same physical location at which all of these ideas can be used to improve the worker’s efficiency. There are many
books and programs dealing with ways to improve productivity and these should be consulted for a complete list of options
available. The cost of these types of programs can be more than offset by the savings.

Using Commercially Available Data for Location Estimating and Comparisons

In addition to individual company internal databases, sources for comparison data include RS Means and Richardson Estimating
Systems [4-7]. These firms, as well as others, now have online databases that are available for use.

RS Means publishes a U.S. city-by-city comparison that is broken down by material and installation costs and by cost division
(concrete, masonry, etc.). Their system involves comparing the ratio of the different city indices to develop a multiplier to apply to
your labor cost estimates. Since they also publish unit rates, they offer comparison factors by states, and by zip codes, which can
then be adjusted to determine a factor to apply to their unit rate extensions.

An example of R.S. Means’ comparison data for two cities is given in Table 4.7.

Table 4.7―Comparison Data for Two Cities per R.S. Means 2013 [4]

Chicago, Illinois 1 Los Angeles, California 2

Matl Inst Total Matl Inst Total
1 Contractor equipment 92.7 92.7 102.1 102.1
2 Site construction 106.6 94.2 97.9 99.4 107.6 105.2
3 Concrete (summary) 100.0 152.9 126.1 103.2 120.3 111.7
4 Masonry 100.7 151.0 131.4 89.9 119.7 108.1
5 Metals 95.4 133.1 107.2 98.3 104.8 100.3
6 Woods and plastics 99.5 157.6 132.6 102.9 120.2 112.8
7 Thermal/moisture protection 103.3 143.1 119.3 102.2 121.2 109.9
8 Openings (doors & windows) 99.4 158.4 113.7 99.6 120.7 104.7
9 Finishes 99.7 156.7 131.7 102.3 118.6 111.4
10 - 14 Equip & specialties 100.0 124.1 104.9 100.0 111.5 102.3
15 Mechanical (Plumbing, HVAC, etc.) 99.9 133.3 113.6 100.1 116.7 106.9
16 Electrical, communications, utilities 97.8 130.8 115.2 99.8 120.8 110.8
Weighted average 99.3 138.3 116.5 99.8 116.6 107.2
1
RS Means 2013 Concrete & Masonry Cost Data, page 1360 [7]
2
RS Means 2013 Concrete & Masonry Cost Data, page 1354 [7]

The comparisons listed in Means are comparisons to a national average. Therefore, in order to compare one city to another, you
need to calculate the RATIO difference, NOT the numerical difference.

𝑆𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝐶𝑖𝑡𝑦 𝐶𝑜𝑠𝑡 𝑥 100

= 𝑇ℎ𝑒 𝑐𝑖𝑡𝑦 𝑖𝑛𝑑𝑒𝑥 𝑛𝑢𝑚𝑏𝑒𝑟
𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡

For example, a building in Chicago was erected for $1,540,000; estimate the cost of the same building in Los Angeles.

𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝐿𝐴 𝑥 𝑐𝑜𝑠𝑡 𝑜𝑓 𝐶ℎ𝑖𝑐𝑎𝑔𝑜

= 𝐶𝑜𝑠𝑡 𝑖𝑛 𝐿𝐴
𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝐶ℎ𝑖𝑐𝑎𝑔𝑜

107.2 𝑥 $1,540,000
= $1,420,000 (𝑟𝑜𝑢𝑛𝑑𝑒𝑑)
116.5

Note: explanation from RS Means Concrete and Masonry Cost Data 2013.

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AACE International Chapter 4 – Labor

PERFORMANCE MONITORING

Work Packaging/Work Breakdown Structure (WBS)

An estimate is usually assembled in work packages. Work packages should be clearly identified. Items that determine what makes up
a work package include portions of the job that complete a specific portion, building, or area, or are assigned to one subcontractor,
can clearly be designed and scheduled, etc. Construction activities have been fairly standard for years.

However, manufacturing, power plants, and other portions of industry also use labor estimating and control. In their situations,
work output and their organizations are more complicated than the labor craft vs. work activities on the construction site. In order
to better address their situations, Activity Based Cost (ABC) methodology has been developed to aid in organizing, analyzing, and
setting up labor monitoring systems within these industries. This methodology gives some guidelines and suggests procedures that
can be used to clearly define appropriate work packages. While there is not sufficient time to discuss this methodology here, a
discussion of ABC is elsewhere in this publication.

For purposes of this presentation, we will start with a simple construction related WBS for a project to install a new boiler at an
existing manufacturing facility.

 Mobilization
 Excavation
 Sub Foundation
 Slab Placement
 Support Steel
 Piping
 Boiler Installation
 Utilities
 Startup
 Cleanup
 Demobilization

The labor estimate is usually the basis for project performance monitoring. The comparison of actual work hours expended versus
the estimated work hours and the development of a relationship between milestone goals is a key tool in determining how much of
the project is completed, how much effort has been expended to get to the current point, if there are problems, what has to be
worked on to overcome these problems, and how this will affect the completion date and final costs. The estimate is shown in Table
4.8:

Table 4.8―Boiler Project Labor Estimate*

Work Quantities Units Work Hours
Mobilization 1 Lot 50
Excavation 300 CF (CM) 100
Sub-foundation 100 CF (CM) 50
Slab placement 100 CY (CM) 270
Support steel 2 Tons 60
Piping 30 LF (M) 90
Boiler installation 1 Lot 50
Utilities 1 Lot 80
Startup 1 Lot 100
Cleanup 1 Lot 50
Demobilization 1 Lot 50
Total Work Hours 950
*Please note that this example uses work hours for CF, CY, and LF and CM, and M solely so that the numbers stay the same. There
was no attempt to convert hours from English to Metric.

Since each of these activities has different units of work, one cannot add the units for each piece together. However, work hours can
be added together. So, if 100 CY (CM) of the slab is to be placed and is half or 50 percent completed, one has earned 135 work hours
(50 percent x 270 estimated work hours). Adding the earned hours up for each of the work packages will then allow a composite
percent complete for the entire project to be determined. A more detailed example is shown in Table 4.9:

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AACE International Chapter 4 – Labor

Table 4.9―Detailed Boiler Project Labor Estimate*

Work Quantities Units Work Hours % Complete Earned Hours
Mobilization 1 Lot 50 100% 50
Excavation 300 CF (CM) 100 100% 100
Sub-foundation 100 CF (CM) 50 100% 50
Slab placement 100 CY (CM) 270 50% 135
Support steel 2 Tons 60 10% 6
Piping 30 LF (M) 90 10% 9
Boiler installation 1 Lot 50 0% 0
Utilities 1 Lot 80 0% 0
Startup 1 Lot 100 0% 0
Cleanup 1 Lot 50 0% 0
Demobilization 1 Lot 50 0% 0
Total Work Hours 950 35% 335
*Please note that this example uses work hours for CF, CY, and LF and CM, and M solely so that the numbers stay the same. There
was no attempt to convert hours from English to Metric.

It is important when reporting percent complete that the milestones and the credit for each are as clearly defined as possible. This
will build credibility with the system in that everyone reporting progress will do it the same way and the data collected will stand up
to management scrutiny.

For some activities, such as cleanup or mobilization and demobilization, it may be very difficult to define the milestones. Progress for
these activities may be monitored using a duration scale. In other words, if these are to take four days to complete, and two days
have gone by, then this portion of the work is 50 percent complete. This is a subjective approximation and is one of many ways to
obtain an earned value when a mathematical calculation is not practical. For these activities, it is imperative that management
understand and agree to the methodology used prior to the start of the project.

Performance Monitoring Calculation Examples:

The example in Table 4.10 illustrates how the overall percent complete is calculated using work completed at any given time.

Table 4.10―Slab Placement Status Calculation Based Upon Physical Work Completed
Slab Placement Estimated Work Activity % Complete Work Hours Earned Project %
Hours Complete
Formwork 67.5 100% 67.5 25%
Reinforcing steel 67.5 100% 67.5 25%
Concrete placed 108.0 0% 0.0 0%
Cured 27.0 0% 0.0 0%
Total 270.0 135.0 50%

In Table 4.11, each activity of the slab placement is estimated and the work hours are allocated to each of the five days in the plan.

Table 4.11―Example 1―Slab Placement Work Progress―Plan

Activity Estimated Work Hours Day 1 Day 2 Day 3 Day 4 Day 5
Formwork 67.5 67.5
Reinforcing steel 67.5 12.5 55.0
Concrete placed 108.0 54.0 54.0
Cured 27.0 27.0
Total 270.0 80.0 55.0 54.0 54.0 27.0

Cumulative Hours 80.0 135.0 189.0 243.0 270.0

(Plan)

In Table 4.12, the status through Day three is reported, for both the physical completion, and the work hours expended.

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AACE International Chapter 4 – Labor

Table 4.12―Example 1―Slab Placement Work Package―Status

Estimated Work Hours
Activity Day 1 Day 2 Day 3 Day 4 Day 5 CPI SPI
Cumulative hours (plan) 80.0 135.0 189.0 243.0 270.0
Cumulative actual hours 90.0 165.0 200.0 1.22
expended
Cumulative actual hours 80.0 205.0 243.0 1.29
earned

Graphic Presentation of Earned Value Data

The project status data for Example 1 is shown in Figure 4.1 in a graphic format. Reviewing this work package, it appears that this
work will finish ahead of schedule and under budget. The differences on the graph between the plan and earned and expended lines
provide a visual analysis of this example. As long as the curves are above the planned line the status is OK. The addition of the Cost
Performance Index (CPI) and Schedule Performance Index (SPI) calculations provides a numerical calculation to further define the
status.

CPI = hours earned/hours expended = 243/200 = 1.22

SPI = hours earned/hours planned = 243/189 = 1.29

If the indices are ≥ 1, then the project is generally on or ahead of schedule. If the project, or elements of the project, is < 1, then
these activities need to be reviewed to determine if action is required to improve their performance, as they are not progressing as
planned. (Note: If more work is completed on non-critical activities, it is mathematically possible for the indices to be > 1 and the
project still to be in trouble. That will be because the critical path activities are behind schedule.)

Example 1 Work Package Status

In Example 1 (Figure 4.1, Table 4.12), the costs are higher than the plan. This is normally not good, except when the schedule is also
ahead of the plan. Since the project is ahead of schedule and the CPI (Cost) is less than the SPI (schedule), this portion of the project
will finish early and may finish less than planned.

300
250
Work Hours

200
150
100
50
0
1 2 3 4 5
Work Days

Plan Expended Earned

Figure 4.1―Earned Value Example 1

In Example 2, the costs (work hours expended) are higher than the plan. This is normally not good, and since the earned is less than
the plan, it looks like there are some problems. Confirming that there are problems, the CPI (cost) and the SPI (schedule) are < 1.0.
So, the work package appears to be over-running the budget, and behind schedule as well.

Table 4.13―Example 2 Work Package―Status

Estimated Work Hours
Activity Day 1 Day 2 Day 3 Day 4 Day 5 CPI SPI
Cumulative hours (plan) 135.0 189.0 243.0 270.0
Cumulative actual hours 90.0 165.0 198.0 0.83
expended
Cumulative actual hours earned 80.0 135.0 164.0 0.87

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AACE International Chapter 4 – Labor

300
250
Work Hours
200
150
100
50
0
1 2 3 4 5
Work Days

Plan Expended Earned

Figure 4.2―Earned Value Example 2

In Example 3 (Figure 4.3, Table 4.14), the costs are less than the plan. This would normally be OK. However, the earned is less than
the plan; it looks like there are some schedule problems. Confirming that there are schedule problems, the CPI (cost) is 1.03 (> 1.0),
and the SPI (schedule) is 0.93 (< 1.0). So, the work package appears to be under-running the plan at a greater rate than the work
package is behind schedule. If the schedule slippage is acceptable, then the budget may still be OK.

Table 4.14―Example 3 Work Package―Status

Estimated Work Hours
Activity Day 1 Day 2 Day 3 Day 4 Day 5 CPI SPI
Cumulative hours (plan) 80.0 135.0 189.0 243.0 270.0
Cumulative actual hours 90.0 150.0 170.0 1.03
expended
Cumulative actual hours earned 80.0 115.0 175.0 0.93

300
250
Work Hours

200
150
100
50
0
1 2 3 4 5
Work Days

Plan Expended Earned

Figure 4.3―Earned Value Example 3

Work Sampling
Work sampling is a method that can be used to determine production or unit rates for specific work activities. These rates are to be
used in setting up a company database, or determining the relationship between work at an individual site and labor standards,
which have been or may be used for estimating projects in the future.

The process involves picking a sample work item or items and having personnel record all activities and labor hours associated with
those activities so that unit rates per production measure can be determined. Personnel who witness and record the activities and
the labor hours worked on each activity can collect data from timesheets, or create their own database based upon their
observation of the work activities. Comparisons can then be made against existing experience or databases to determine the most
reasonable data to use as the standard. Or, the data can be used to determine how the actual work is deviating from the standard.

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AACE International Chapter 4 – Labor

CONCLUSION
In this chapter, the basics of labor cost development and progress monitoring have been discussed. In all instances, it is imperative
that the estimator/cost engineer understand the basics in order to make sure that all of the areas impacting the estimate are
thoroughly investigated and that the correct data is used in a consistent manner.

REFERENCES
1. AACE International Cost Engineer’s Notebook, Morgantown, WV.
2. AACE Recommended Practice 17R-97; Cost Estimate Classification (Revised November 29, 2011). Morgantown, WV: AACE
International.
3. AACE Recommended Practice 18R-97, Cost Estimate Classification System for Process Industries. Morgantown, WV: AACE
International.
4. Richardson Engineering Services, Inc. (2007). Rapid Construction Cost Estimating System. Mesa, AZ.
5. Richardson Engineering Services, Inc. (2007). Process Plant Construction Estimating Standards.
6. R.S. Means Co. Inc. (2013). Construction Cost Data. Kingston, MA.
7. R.S. Means Co. Inc. (2013). Concrete and Masonry Cost Data. Kingston, MA.

The following is a list of companies, by no means all inclusive, that provide estimating data:

 ARES Corporation
 Building Systems Design, Inc.
 ICARUS/Richardson―Aspen Technology, Inc.
 RS Means
 Win Estimator

47