Remember sitting in math class and wondering what any of the stuff your teacher was saying had to do with the real world? Turns out owning a residential construction or remodeling business requires a lot of math! Fortunately for you, there are tons of resources available to help calculate construction costs – many for free.
To get you headed in the right direction, this article will walk you through the most common calculations used in construction, how to solve them and highlight the different types of construction calculators available — what you should use them for, and where you can find them.
In construction, there are all sorts of calculations you need to make for a job, like labor and material costs, overhead costs, etc. Most importantly, you need to calculate how much of a markup will cover your overhead and meet your profit goal.
We’re going to dive deeper into the 5 most common construction calculations and explain the how best to calculate them:
Construction Labor Costs
Construction Material Costs
Project Overhead and Profit
Construction Project Profit Margin
Construction Cost Per Square Foot
Calculating labor costs is not always straightforward, especially since some smaller residential construction companies don’t have labor on the payroll. In this case, you’re most likely hiring subcontractors on each project at an hourly rate, which changes over time. There are a few ways you can source and determine labor costs:
One of the most valuable ways residential builders and remodelers can spend their time is completing a project review at the conclusion of each job. This helps you determine how accurate your estimated costs were for labor. That information can then be used to determine labor costs for future projects.
If you don’t have a go-to subcontractor to ask, request quotes from two or three specialty contractors that have a reputation for delivering the quality of work and service you’re looking for. If their estimates wildly vary, you can either take the average or use the rate of the one you’re most likely to hire.
Peruse recent employment ads to see what your competitors are offering. Some online employment listing companies like Indeed and ConstructionJobs.com can give you an idea of what others are offering for similar jobs in your local area.
The Bureau of Labor Statistics has a treasure trove of information on labor costs. You can see salary data for different jobs in the construction industry at a national, state, and regional level.
Figuring out your material costs sounds simple, right? Just measure the area you are building (or remodeling) and calculate the square footage. Then multiply the price per unit by the number of units required to see how much material you need for that area (for example, 20 boxes of tile at $30 a box = $600). Where it gets complicated in construction is when there are many different materials involved, which we all know happens often. Lumber, electrical wiring, cement, pipes, etc. This is when using a construction material costs calculator that allows you to enter line items to do the math for you comes in handy.
For estimating jobs, you can save time by using a database of materials. The two largest databases available in the construction industry are RS Means and Craftsman. You can always make adjustments to account for local market conditions, material quality, and level of installation difficulty. Many construction management platforms include estimating software that use a cost database and does most of the heavy lifting for you.
Overhead refers to those fixed costs that you pay – whether you have active projects or not. Your profit is, obviously, what’s left after you subtract overhead and construction costs. (Note that this is pre-tax profit.) Here are some areas that are considered overhead costs:
Your salary? Say, what? It’s important to pay yourself out of overhead costs – not out of profit. You may give yourself a bonus out of the profit, but you want to make sure you are paying yourself a regular salary. Unless you’re cool with working for free.
You may have heard of the “10-10” rule. This is where you markup the cost estimate to account for overhead costs at 10%, plus a profit margin of 10%, which is a standard percentage used in the construction industry. You would think this means you just increase the total construction costs by 20% to arrive at your final estimate. Unfortunately, that won’t get you to a 20% gross profit. Why? Because markup / total price equals gross profit percentage. Let’s see how that would work.
You’ve calculated total construction costs at $100K. A markup of 20% equals $20K [($100K * .20 = $20K)]. So you add the $20K to the $100K and you’ve got a total cost of $120K. What you don’t have is a 10% gross profit margin. Next up: How to (accurately) calculate your profit margin on a construction job.
In the above example, adding a 20% markup is not enough. A $20K markup divided by a total price of $120K equals 16.66% [(Markup $ / Total $) * 100) = Gross Profit]. Now, if you subtract the 10% of overhead from the 16.66%, your profit margin is only 6.66% ... not 10%.
In order to achieve the correct profit margin of 10%, you will need to markup all construction costs by 25%, not 20%. The equation you can use to find this is [Markup = (Margin / (1 - Margin) * 100)]. Or, in this example, [(.20 / (1 - .20) * 100) = 25%].
Now that you have the correct markup percentage of 25%, you can determine that your new total cost should be $125k [($100k * .25) + $100k] not $120k. When you divide your new markup amount of $25K by the total (as shown previously), your gross profit is now 20%. When you subtract the 10% in overhead you're left with a true 10% gross profit margin. (Learn more about markup.)
Calculating price per square foot for new house construction or remodeling works the same way – total costs divided by total square feet of the final structure. In fact, this can be a fast way to bid on jobs. But you’ll need historical data from past projects. This way your bid per square foot is based on real world numbers. You can make adjustments based on the difficulty of the job and market trends in your area. Keep in mind that clients are likely to come back to ask for your best and lowest bid – or for some sort of discount. Why spend hours on a detailed estimate when what you’re really submitting is an opening bid?
You’re not building widgets here. Although every business deals with changes in labor and material costs, it is particularly challenging in the residential construction business. Small custom home builders can only standardize the building process up to a point. Your competition can impact your gross profit margin. This is where the 10-10 rule is not hard and fast. You may have to accept a lower profit margin in order to win a bid.
It can be helpful to keep up with current news to have some idea where, for example, material and labor costs are heading. The National Association of Home Builders (NAHB) provides a wealth of free information. This NAHB article on building materials is a great example. Members get access to additional data and reports.
There are several sources for construction calculators.
There are many free construction calculators available online. However, you do want to make sure you are using calculators from a reputable company. The last thing you want to do is base your bid on numbers churned out by a faulty calculator.
A few of the more popular options which offer dozens of material and measurement calculator options include:
For those of you who were paying attention in math class, you can build your own construction calculators in Excel or Google Sheets. There are also pre-built spreadsheet-based construction calculators available. Search the App Store or Google Play for “construction calculators” to find them.
Vendors who sell construction materials often provide calculators to help you determine how much of the material you’ll need to buy for your project.
You can buy construction calculator software. One of the most popular construction calculator software programs is QuickBooks Online Advanced.
You can test out the software with a free or trial version. Although free is always nice, at some point a full-featured construction calculator is worth paying for. The savings you realize by providing accurate estimates in less time to prospective clients can outweigh the cost of the software.
If you prefer a good ole’ fashion handheld calculator, you’re in luck. There are several portable calculators available on the market to choose from, such as the Construction Master Pro, that were built specially for construction math.
You can find them at Home Depot, Lowes, or any other large home improvement store, or read the reviews and purchase one directly from a vast selection of construction calculators on Amazon.
You can use a construction estimating service to do the calculations for you. It may be worth the additional cost when bidding on a particularly large job. Or a job for a prospective client who you believe can bring in more work in the future.
At BuildBook we are always trying to find ways to help residential home builders and remodelers be successful, which is why we created this in-depth guide on construction calculations and calculators. While you’re here, be sure to check out our construction management platform and sign up for a risk-free trial.
Believe it or not, you don’t need a degree in mathematics to understand how to calculate construction costs. You just need to gather data from current sources – as well as past projects – to input relevant data into those construction calculators. Once you’ve done the research, let the calculator do the hard part. Good calculations lead to good estimates which can lead to more business. Calculate that.