But, to achieve your final outcome, you’ll need to manage: 

• Human resources (the specialists involved in renovation), 
• Financial resources (the budget available for renovation), and 
• Physical resources (materials required for this project).

This scenario is a simplified version of resource management. The reality is that managing resources becomes even more challenging in a business context — especially when managing large or complex projects. To add to the problem, resources, such as talent and money, are often limited.

So, how to do more with less? 

You can find the answer in this guide as we cover these points:

• The types of resource management, 
• The stages involved in managing resources, and 
• Some expert tips to help you optimize your resource management.

Let’s get started.

What is resource management? 

Resource management refers to a set of practices and tools that help businesses make the best use of their resources, such as time, money, and people. The goal of resource management is to ensure the right resources are available at the right time for the right task or project.

Let’s put it another way.

Ever played a video game called Tetris? In this game, players must manipulate falling blocks of different shapes to fit them together efficiently within a confined space. If the blocks pile up and reach the top of the screen, the game ends.

Now, let’s replace the falling blocks with vital resources: 

• Time, 
• Money, 
• People,  
• Information, and 
• Materials. 

Resource management is all about skillfully putting these blocks together efficiently to achieve project success. 

For instance, if you are building a house, you will need to put together resources, such as:

• People (contractor or subcontractor),
• Time (2 years),
• Money ($350,000),
• Materials (bricks, tiles, paint, furniture, etc.), and 
• Information (knowledge about building permits and safety regulations).

Just as in Tetris, if you don’t manage these resources well, your project (and business) can suffer. The harsh consequences of poor resource management can include financial losses, missed opportunities, and even project failures. 

But, how exactly do you master the art of resource management?  

Before we get into the strategies, let’s first look at the types and stages of resource management.

What are the 5 types of resource management?

When we talk about the types of resource management, we are essentially talking about managing different types of resources. 

As we all know, people, time, and money are the most important resources every business needs. But, you may need other resources for efficient project management, such as raw materials and information.

Let’s look at these resources in some detail.

Type #1: Human resource management (HRM)

As the term suggests, human resource management is all about managing the most important resource of organizations — the human capital. In other words, HRM involves a set of practices and tools a company uses to: 

• Employ, 
• Compensate, 
• Train, 
• Nurture, and 
• Retain employees.

In their book Human Resource Management: The Key Concepts, authors Chris Rowley and Keith Jackson categorize HRM activities into these four groups:

• Employee resourcing — workforce planning, recruitment, candidate assessment, contracts of employment, and onboarding,
• Employee rewards — compensation strategies, performance evaluation, benefits, motivation, and rewards,
• Employee development — skills development, knowledge transfer, career and leadership development, and
• Employee relations — creating and implementing policies about workplace safety, discrimination and bullying, time tracking, legal compliance, work-life balance.

The purpose of HRM is to nurture and engage employees. According to Gartner’s research, a nurturing environment can then help businesses: 

• Achieve organizational goals,
• Manage other resources (such as money, materials, and data),
• Boost productivity,
• Retain top talent,
• Enhance customer satisfaction, and
• Improve revenue growth. 

Type #2: Financial resource management (FRM)

Financial resource management involves efficient handling of a business’ cash flow and other assets. Financial resources can include both:

• Internal resources — profits generated by sales, capital funding, investments, and assets that can be converted into cash, and
• External resources — credit and loans from banks, government agencies, and other external sources.

FRM includes the following activities:

• Budgeting — setting financial plans and limits for income and expenditures,
• Financial planning and forecasting — creating strategies for future financial performance,
• Cost control — reducing expenses to ensure the business stays profitable,
• Bookkeeping and accounting — recording, analyzing, and reporting financial transactions,
• Resource allocation — allocating funds and assets to different departments within an organization, 
• Financial risk assessment — evaluating potential financial threats and developing strategies to manage them,
• Asset management — monitoring and managing the inventory to maximize return on investment, and
• Regulatory compliance — adhering to legal and industry-specific financial regulations and standards.

The main goal of FRM is to ensure the business uses its cash and assets to stay profitable and competitive. This is more important than ever with lack of cash flow being the top reason for business failure, according to a 2022 Skynova survey.

On top of that, a different study found that 65.2% of businesses stayed profitable by optimizing their cash management practices.

These findings highlight the importance of effective FRM that helps businesses maximize their profitability and stay competitive.

Type #3: Time resource management (TRM)

Next up in our list is time management, which involves tools and strategies to make the most efficient use of time.

TRM involves the following activities and processes:

• Goal-setting — prioritizing and focusing on essential tasks and goals,
• Task scheduling — allocating time to activities to ensure each moment is purposefully assigned,
• Streamlining processes — reducing complexity to help utilize time efficiently,
• Promoting time discipline — encouraging a culture where everyone values efficient time management, 
• Adjusting workloads and priorities — using feedback to optimize workloads and schedules to boost productivity, and
• Tracking time — using time tracking apps to measure progress and allocate resources.

On top of all the other benefits each time management strategy comes with, time management techniques can also help individuals and organizations reduce procrastination and improve productivity.  

In fact, a study by Bain & Company found that efficient time management can help improve employee engagement while lowering costs and boosting productivity.

Another study titled Does time management work? A meta-analysis found that time management helps enhance employees’ job performance and well-being.

Type #4: Information resource management (IRM)

As defined in a research paper on information resource management, “IRM is a complex process involving the planning, developing, controlling, operating, and utilizing of organizational information resources.”

The purpose of IRM is to efficiently manage data resources to achieve business goals. For example, by gathering and analyzing customer purchase history, businesses can create personalized marketing messages to improve customer experience.

In the example we gave above, you saw that a house owner needs to possess specific information, such as knowledge of building permits, price of materials, etc., to complete their project.

Here are the aspects of information resource management:

• Knowledge management — organizing and facilitating access to data in the form of documents, digital content, reports, and intellectual assets,
• Data analytics — making informed decisions based on data and analytics,
• Data cleansing — removing duplicate or unwanted data to improve data quality, 
• Maintaining data repositories — creating a centralized database to offer a unified view of the company’s data, 
• Data governance — establishing policies and standardized practices related to data management, 
• Data security and compliance — protecting critical data by using methods, such as access control, encryption, and other security measures, and
• Information infrastructure — managing the tools that store and handle data, such as software, hardware, and network resources.

Type #5: Physical resource management

This type of resource management involves managing your business’ tangible physical assets — office equipment, building, vehicles, and raw materials. 

For instance, a business that offers laundry services will need to manage physical resources, such as washing machines, dryers, irons, steamers, tables, etc.

The primary goal of physical resource management is to use these assets efficiently to achieve the desired goals. 

These are some of the aspects and activities linked to physical resource management:

• Acquiring resources — purchasing or renting new physical resources as needed,
• Asset maintenance — scheduling regular maintenance to optimize the assets’ functionality and lifespan,
• Inventory control — managing inventory levels to ensure that essential materials and supplies are available when needed,
• Asset tracking — using technology, such as asset tracking systems or software, to monitor the location, condition, and usage of physical resources, and
• Resource optimization — identifying opportunities to enhance the efficiency and cost-effectiveness of physical assets.

What are the stages of resource management?

The stages involved in resource management can depend on the complexity of the project and the type of resources being managed.  

For instance, in the case of software product design, it all starts with understanding the project scope, according to Zoran Vizmeg, Project Manager at CAKE.com. He lists the following stages of resource management:

• Step #1: Identifying resource needs — the project team, the product team, and the codebase team discuss the project requirements, complexity, and feasibility.
• Step #2: Assessing and planning resources — with the help of the team, the project manager then creates a project roadmap, defines each task, and estimates the resource requirements.
• Step #3: Allocating resources — the project manager assigns tasks to individual developers or teams.
• Step #4: Scheduling resources — the manager creates a detailed schedule for each task with the help of a scheduling tool, such as Clockify.
• Step #5: Monitoring resources — the project team monitors the project and resources. 
• Step #6: Adapting based on feedback — based on feedback from the codebase team, developers, and the project team, the project manager fine tunes resource management.

Thanks to his expertise in project management, Zoran helped us craft the stages of resource management. Let’s look at these various stages involved in resource management in some detail. 

Stage 1: Identifying resource needs

In this initial stage, organizations identify the resources required to achieve specific goals or projects. This can include human resources, financial resources, specific materials, equipment, and others.

The following questions can help you identify the resources you need for the project:

• What is the scope of the project (budget, timeline, goals, and deliverables)?
• What resources do we need to successfully complete the project?
• How much of these resources do we need and when do we need them?
• Do we need any external resources, such as specialized equipment or experts?
• What skills are necessary to complete the project tasks? 
• How can we access the required resources?
• Do we need backup resources and if yes, where do we find them?

Project managers can use several tools and techniques to estimate project resource needs:

• Expert judgment — consulting experts well-versed in the type of project,
• Alternative analysis — comparing different ways to accomplish tasks and identifying the most suitable or cost-effective resources,
• Published industry data — looking at published data on project resource estimation in industry-specific journals, books, articles, and surveys,
• Project management software — selecting the right software with features that help them find the best combination of resources they need, and
• Historic internal data — drawing insights from the organization’s historical data, such as purchase, time tracking, and accounting records.

Stage 2: Assessing and planning resources

The next step is to conduct a thorough assessment of required resources. This involves determining the: 

• Availability, 
• Quantity, 
• Quality, and 
• Capabilities of the required resources.  

If your organization does not have all the resources you need, you may need to invest in the required resources.

For instance, an initial assessment of available human resources helps a company understand if there is a lack of necessary skills for an IT project. The company can now make informed decisions on hiring skilled developers or upskilling its team members. 

This is also the stage where project managers create a detailed project roadmap to understand the resource requirements, according to Zoran.

Stage 3: Allocating resources 

Now that you know what resources you need, the next step is to assign them (human, financial, time resources, materials, etc.) to each task or project. The goal of resource allocation is to distribute resources in the best possible way to optimize productivity, lower costs, and achieve the desired results.

For example, a junior graphic designer may need 2 days to complete a design task, while an experienced designer may need only 3 hours. If your design project has a tight deadline, assigning the senior designer is obviously the best way to ensure the task gets completed on time.

As Zoran Vizmeg, our contributor, explains, the third stage of resource management in the IT company means communicating with the development team in order to assign those newly created tasks to developers and confirming estimation. 

Here’s a real-world example of successful resource allocation from the book Human Resource Management: Linking Strategy to Practice. 

Trader Joe’s, a grocery store, is known for its customer-centric approach. With an aim of making their shoppers happy, they choose employees who are naturally outgoing, upbeat, and have a strong customer focus, in addition to a sense of humor. 

Therefore, by allocating their resources the best possible way and selecting the right person for the job, the company gained a competitive advantage and remained profitable.

Stage 4: Scheduling resources

Resource scheduling involves creating a timeline or schedule explaining when and how you will use resources. This process ensures that resources are allocated at the right time and in the right amounts.

While there are many methods you can use to schedule your resources, two of the most commonly used ones are Gantt chart and Critical Path Method (CPM). 

A Gantt chart provides you with a visual representation of your tasks and their timelines.

For example, in the Gantt chart given below, you can see the time taken to complete each task and associated activities. The responsible departments are color-coded along with the assignees for each activity.

On the other hand, Critical Path Method (CPM) involves identifying the logical sequence of tasks and dependencies in a project. In other words, each project usually consists of multiple tasks, and some tasks may be dependent on other tasks. 

For instance, if the project is to build a botanical garden, you cannot plant trees until the site is leveled and soil is prepared. 

Stage 5: Monitoring and control

Once resources are allocated and tasks are underway, ongoing monitoring is essential. This process involves: 

• Tracking resource usage and project progress, and 
• Making adjustments as needed to ensure that goals are met.

According to Zoran, this is also the time when the team “solves bumps on the road that they didn’t see during the planning phase.”

Let’s say a construction project is underway. As the project progresses, the project manager closely monitors how employees use resources. They could use construction timesheets, such as Clockify, to ensure that workers are on-site as scheduled and are productive.

Resource monitoring also includes tracking costs associated with labor, equipment, and materials. If actual costs exceed the budgeted costs for a resource category, the project manager can then take corrective actions. These actions can include measures to identify areas that require cost optimization, seeking approval for budget adjustments, or reallocating resources.

For instance, if the material costs are over budget for a construction project, the project team may decide to use alternative materials to meet the project requirements.

Stage 6: Feedback and adaptation

At defined intervals, organizations need to evaluate the performance and results achieved. This feedback helps improve future resource planning efforts.

Zoran believes communication and constructive feedback are the keys to identifying areas for improvement:

“Communication is important in every part of our lives, especially at work. If we want to grow, we need to get feedback in order to recognise which part of our personal development needs to be improved. If we don’t get any constructive feedback, we can hardly detect what can be improved.”

Sometimes, projects or priorities change, or unforeseen circumstances arise. In such cases, project managers need to reallocate resources to address new needs or challenges.

Based on the evaluation and lessons learned, organizations adapt their resource planning strategies and processes for future projects or planning cycles.

Why is resource management important?

Given that lack of talent, time, and budget are the key obstacles to organizational success, managing these limited resources is more important now than ever.

Let’s see why it’s crucial for project managers and companies to manage their resources properly: 

• Improvement in productivity and profitability — when companies use resources efficiently, they can boost productivity and revenue. A McKinsey study shows that firms that prioritize human capital development earn a profit of over $1 million and emerge as “superstars.”
• Securing a competitive advantage — organizations that manage their resources well are often more competitive. For instance, smart data management helped 53% of manufacturers create a competitive advantage for their companies, according to IBM research. 
• Increasing employee engagement — making the best use of the time, skills, and competencies of employees can boost morale and job satisfaction. 

Yet, most organizations struggle to manage their resources, with the consequences often being profound. In an analysis of 16,000 projects, Bent Flyvbjerg, co-author of How Big Things Get Done, found that just 8.5% of companies were able to stick to their planned budgets and timelines.

Underutilizing resources can also have negative consequences, particularly in big projects. For example, when oil rigs use just 77% of their production resources, the industry suffers a revenue loss of $200 billion each year, according to a McKinsey study.  

This brings us to the question: how to improve resource management?

How to improve resource management? 

The key to effective resource management is to understand the project’s scope and resource requirements thoroughly. To help you out with that, here are some tips for optimizing resource management.

Tip #1: Be proactive and keep an eye on progress

In the sections above, you learned about the typical stages of a software designing project that Zoran described. By following an established process, Zoran can avoid last-minute scrambles and shortage of resources for any future projects.

While resource managers cannot foresee every possible outcome, being proactive and planning ahead can help them manage resources wisely.

One way to manage resources efficiently is to create a resource management policy. Here are some questions that your resource management policy needs to address:

• Who is responsible for managing resources? 
• How will you assess resource requirements?
• How will you allocate resources?
• What procedures will you put in place to address resource shortages?
• What tools will you use to monitor resource utilization?

Another way to be proactive is to anticipate future resource needs. 

An easy way to anticipate future resource needs is to use a project forecasting tool such as Clockify. The software uses current data on budget, time, and schedules to make predictions about how the project is likely to perform in the future.

In Clockify, you can keep an eye on project progress 

In fact, a case study on streamlining resource management further confirms the importance of estimating future resource needs. 

Namely, an IT company owner sets the monthly estimates for projects at the beginning of each month which helps them forecast the hours of work the team needs to achieve these estimates. This habit helps the owner know exactly how the project is going and whether it is taking up more time than expected. It also helps establish a time management culture in the company.

Tip #2: Foster open communication and coordination

While resource or project managers are typically accountable for resource management, it is important to involve all stakeholders in the process. Depending on the type of project, the stakeholders can include the project team, HR, finance, and purchase departments. 

In addition to creating a collaborative environment, it is important to encourage ongoing communication between these stakeholders.

Ongoing communication makes it easy for team members to share resource needs, challenges, and ideas to improve resource management.

According to Michael Shick, PMP and assistant professor of project management at Western Carolina University, the foundation for open communication needs to be set in the project initiation stage:

“Open communication and feedback helps to decrease misunderstandings, which in turn should promote enhanced work performance and productivity. Additionally, open communication helps to build trust and fosters understanding, suggesting the significance of open dialogue.”

We can see how important ongoing communication and coordination is by looking at  the often quoted example of the Airbus A380 (the world’s largest passenger airplane) project.

Airbus had hired multiple design teams and component manufacturers spread across countries to manufacture Airbus A380. A lack of clear and transparent communication between various teams led to multiple issues during the aircraft’s production. As a result, the project suffered delays, cost overruns, material, and manpower shortages.

Tip #3: Track and monitor resource utilization on a regular basis

Resource monitoring and control play a vital role in ensuring that you are utilizing the resources in the best possible way. 

But how frequently should you monitor resource utilization? A survey on resource utilization by the Resource Management Institute (RMI) shows that most organizations measure resource utilization on a weekly or monthly basis. This is also a recommended practice.

Regular monitoring is also a great way of preventing issues, such as underutilization or overutilization of resources and resource-related delays or cost overruns.

For example, by monitoring overtime hours, companies can identify how they distribute overtime and whether some employees can take over more work so that others don’t work overtime. This can help prevent burnout and keep employees motivated.

In addition, tracking the time spent on each task can easily help identify wasted time and make additional changes where needed. 

Tip #4: Train resource managers

Resource managers need to have a broad skill set — ranging from project management related skills to the ability to communicate and manage people. 

However, RMI’s survey titled Profession of Being an RM/RMO Leader shows that 92% of organizations find it hard or very hard to find skilled resource managers. And, this is one of the key factors that can hamper effective resource management.

The good news is, like most other skills, learning and practicing are the keys to mastering resource management.

By investing in resource management training, organizations can empower their workforce with the essential skill sets. These training initiatives can include: 

• Courses in resource allocation methodologies, 
• Project management frameworks, and 
• Soft skills development.

According to Elizabeth Harrin, experienced project manager and author of Managing Multiple Projects, one of the biggest challenges lies in making sure all members of the team, particularly the less experienced, have the opportunity to learn. 

“We’d all like the best, most experienced, well-trained people to be on our projects, but that would mean junior and less experienced people would never get a chance to practice their skills. If you want your staff to stay with you long term, you should look for ways to provide them with experiences that stretch their abilities and help them develop as professionals.”

How to manage resources with Clockify 

Why do you need tools such as Clockify to manage resources? Here’s a compelling reason — the above-mentioned RMI’s survey on resource utilization found that the lack of automation tools is one of the biggest inhibitors of effective resource management. 

Surprisingly, 57% of survey respondents said they rely on spreadsheets for resource management despite the availability of resource management tools.

As a resource management software, Clockify streamlines various aspects of resource management. From scheduling tasks to tracking project progress, there are many features that help you fast-track resource management. Let’s see how.

Clockify enables you to plan and visualize your projects and milestones. You can:

• Organize your projects by clients, 
• Create tasks within these projects, and 
• Define the timelines for each task and project.

With Clockify, you can quickly determine who on your team is busy and who is available for new assignments. Later on, you can easily assign new tasks and define work schedules. This visibility is crucial for resource allocation and ensuring that work is evenly distributed.

Clockify offers time tracking capabilities — allowing your team to log their hours accurately. This feature helps you monitor work progress, productivity, and time utilization.

This tool also allows you to set budgets for each task and project. You can then track and compare the actual versus estimated time and expenses to optimize resource management.

Conclusion: Plan ahead and track to optimize resource management

Given the constraints of time, money, and talent in today’s business landscape, effective resource management is the key to project success. 

To ensure you’re making the most of your resources, remember to: 

• Understand the project scope, 
• Plan ahead, 
• Allocate wisely, and 
• Continuously track resource usage. 

By implementing the strategies we’ve listed, not only can you optimize resource management, but you can also boost productivity and gain a competitive edge.

Above all, be strategically hawk-eyed on your resources and invest in training resource managers. Now, you’ll be well on your way to achieving your organizational goals.

Depending on whether you live in a right-to-work state or not, you may have to join a union at your company or pay union dues and fees.

If you’d like to learn more about the states which have and have not passed the right-to-work law, stick with us.

In this right-to-work states guide, we’ll:

• Explain what a right-to-work law is,
• Define a right-to-work state,
• Tell you which US states have right-to-work laws and which do not,
• Let you know if there are any federal right-to-work laws, and
• Provide you with some answers to frequently asked questions related to right-to-work states.   

What is a right-to-work law?

According to the Federal Reserve Board, the right-to-work law in the US is a law that says that workers are not required to join a union at their workplace “as a condition of their employment.”

In other words, in the United States, a right-to-work law is a law that gives workers the freedom to choose whether they want to join a labor union at the company they are working for or not. 

What is a right-to-work state in the US?

As the Legal Information Institute of Cornell University puts it, a right-to-work state is a state that “has a law prohibiting union security agreements.”

Furthermore, according to the National Labor Relations Board (NLRB), in the US states where union-security agreements are prohibited, “it is up to each employee at a workplace to decide whether or not to join the union and pay dues.” 

According to the abovementioned source, if workers are represented by unions, such employees have to pay union dues. Union dues are the amounts that such workers need to pay within 30 days after they are hired.

What states are right-to-work states? 

While some states in the US have right-to-work laws, others do not. To see all US states and their status when it comes to right-to-work laws, take a look at the table below. 

We also included the “Notes” section in the table to explain any additional laws and regulations regarding labor unions and workers’ rights in the US.

This table refers to workers who are employed by the federal, state, or local government (it does not refer to private-sector employees). 

State	Right-to-work law	Notes
Alabama		/
Alaska		Following the Janus v. American Federation of State, County and Municipal Employees (AFSCME) decision, Attorney General Kevin G. Clarkson released a formal statement saying that the state of Alaska is not allowed to withdraw union dues and fees from an employee’s paycheck unless the employee gives them the authorization to do so.
Arizona		/
Arkansas		/
California		According to California’s State Employer-Employee Relations Act, state employees have the right to form or join the labor union or refrain from doing so. However, a nonmember may have to pay their “fair share fee,” that is, their employer may withdraw a certain fee from their wages for the union’s representational services.
Colorado		According to the Colorado Labor Peace Act, employees at most workplaces have the right to form or join a labor union or refrain from doing so. However, an employer has the right to enter into an all-union agreement (an agreement requiring employees to beunion members or pay union fees if they are not members) with the employees’ representative.
Connecticut		Under Connecticut’s Labor Relations Act, most employers cannot require an employee to join a labor union or refrain from doing so. However, an employer is allowed to make an agreement with the employees’ representative that requires membership as a condition of employment. Under Connecticut’s collective bargaining laws following the Janus v. AFSCME decision, public employers cannot deduct union fees from an employee who’s a nonmember unless the employee gives them the authorization to do so.
Delaware		According to Delaware’s Public Employment Relations Act, public employees have the right to form or join labor unions or refrain from doing so. However, an employer has the right to enter into a collective bargaining agreement with the employees’ representative where they may require that each nonmember pays a fair share fee through their wages.
District of Columbia		According to the Code of the District of Columbia, Section 1–617.06, all employees have the right to form or join a labor union or refrain from doing so. However, an employee may have to become a member of a union as a condition of employment if there’s an agreement requiring so. Furthermore, if there is no such agreement, and the employee chooses not to become a union member, they may still have to pay union fees (a portion of union dues intended for representational services).
Florida		/
Georgia		/
Hawaii		According to the Hawaiʻi Revised Statutes, Section 89-3, public employees have the right to join or form a labor union or refrain from doing so. However, an employer may enter into a collective bargaining agreement saying that each employee is required to join the labor union or pay an identical amount of labor dues as a condition of employment.
Idaho		/
Illinois		According to the Illinois Public Labor Relations Act, public employees have the right to form or join labor unions or refrain from doing so. However, an employer may enter into a collective bargaining agreement with the employees’ representative where they may require that each nonmember pays a fair share fee through their wages.
Indiana		/
Iowa		/
Kansas		/
Kentucky		/
Louisiana		/
Maine		According to the Maine Municipal Public Employees Labor Relations Law, public employees have the right to form or join a labor union or refrain from doing so. However, an employee may be required to pay a fair share fee for the union’s representational services.
Maryland		According to the Maryland Labor and Employment Statute, any type of promise (whether oral or written) of becoming or not becoming a member of a union made between an employee and an employer is invalid. Furthermore, as Maryland Collective Bargaining Law indicates, state employees have the right to form or join a labor union or refrain from doing so. However, an employee may be required to pay union fees if they are represented by that union.
Massachusetts		According to Massachusetts Labor Relations Law, employees at most workplaces have the right to form or join a labor union or refrain from doing so. However, an employer may enter into an agreement with the employees’ representative that requires membership as a condition of employment. Furthermore, an employer may require each employee to pay a fee for the union’s representational services if there’s a collective bargaining agreement that states so.
Michigan		In 2023, the Senate introduced Bill No. 34 which repealed Michigan’s right-to-work law. Under this Bill, private-sector employers may now enter into a collective bargaining agreement with the labor union and require each employee who’s a part of the bargaining unit to pay a fair share fee.
Minnesota		According to Minnesota Statutes, Section 179A.06, public employees have the right to form or join a labor union or refrain from doing so. However, an employer may enter into an all-union agreement with the employees’ representative. Moreover, employees who are nonmembers may also be required to pay their fair share fee for the union’s representational services.
Mississippi		/
Missouri		/
Montana		According to the Montana Code Annotated, Section 39-31-201, public employees have the right to form or join a labor union or bargain collectively through an agreement. Whether they may refrain from joining a union is not clearly stated. Furthermore, each state employee who’s represented by the union may be required to pay a union fee if there’s a collective bargaining agreement that states so.
Nebraska		/
Nevada		/
New Hampshire		According to the New Hampshire Public Employee Labor Relations Act, public employers cannot deny their employees the right to form or join a labor union or bargain collectively through an agreement. Furthermore, employees may be required to pay certain fees to a union if they are represented by that union.
New Jersey		/
New Mexico		According to New Mexico House Bill 85, employers who are not governed by the NLRA have the right to enter into union-security agreements with labor organizations.
New York		As the New York State Public Employees’ Fair Employment Act declares, public employees have the right to form or join a labor union or refrain from doing so. However, an employer may enter into an agreement with the employees’ representative that requires membership as a condition of employment.
North Carolina		/
North Dakota		/
Ohio		Under the Ohio Revised Code, Section 4113.02, any type of promise (whether oral or written) of becoming or not becoming a member of a union made between an employee and an employer is invalid. Moreover, public employees have the right to form or join a labor union or refrain from doing so. However, an employer may enter into an agreement requiring a nonmember to pay a fair share fee for the union’s representational services as a condition of employment.
Oklahoma		/
Oregon		Under Oregon Revised Statutes, Section 663.110, employees at most workplaces have the right to form or join a labor union or refrain from doing so. However, an employer has the right to enter into an agreement with a labor union that requires each employee to become a member of a union as a condition of employment.
Pennsylvania		According to the Pennsylvania Labor Relations Act, employees at most workplaces have the right to form or join a labor union or bargain collectively through an agreement. Furthermore, an employer may enter into an agreement with the employees’ representative that requires membership as a condition of employment.
Rhode Island		As the Rhode Island Labor Relations Act states, employees at most workplaces have the right to form or join a labor union or refrain from doing so. However, an employer may enter into an agreement with the employees’ representative that requires membership as a condition of employment. Moreover, an employee who’s a nonmember may be required to pay certain fees to a union if they are represented by that union.
South Carolina		/
South Dakota		/
Tennessee		/
Texas		/
Utah		/
Vermont		According to Vermont’s State Employees Labor Relations Act, a state employee has the right to form or join a labor union or refrain from doing so. However, an employer may enter into an agreement with the employees’ representative that requires membership as a condition of employment. Furthermore, an employee who’s a nonmember may be required to pay their fair share fee for the union’s representational services.
Virginia		/
Washington		Under the Revised Code of Washington, Section 41.80.050, state employees have the right to form or join a labor union or refrain from doing so. Furthermore, an employee who’s a nonmember may be required to pay their fair share fee for the union’s representational services.
West Virginia		/
Wisconsin		/
Wyoming		/

What are the federal right-to-work laws? 

The National Labor Relations Act (NLRA) is the only right-to-work law on a federal level in the US, and it only refers to certain private employers. 

According to the NLRB, the National Labor Relations Act is a “federal law that grants employees the right to form or join unions, engage in protected, concerted activities to address or improve working conditions, or refrain from engaging in these activities.”

In addition, the National Labor Relations Act covers only private-sector employees. 

When it comes to public employees, their right-to-work rights depend on laws and regulations issued by each state individually.

FAQs about right-to-work states

To provide you with some additional information regarding right-to-work states, we’ve answered some of the frequently asked questions on this topic, so check out the section below.

To sum up, what states are right-to-work states? 

In total, there are 28 US states that have right-to-work laws.

The following is a list of right-to-work states:

• Alabama,
• Arizona,
• Arkansas,
• Florida,
• Georgia,
• Idaho,
• Indiana,
• Iowa,
• Kansas,
• Kentucky,
• Louisiana,
• Mississippi,
• Missouri,
• Nebraska,
• Nevada,
• New Jersey,
• North Carolina,
• North Dakota,
• Oklahoma,
• South Carolina,
• South Dakota,
• Tennessee,
• Texas,
• Utah,
• Virginia,
• West Virginia,
• Wisconsin, and
• Wyoming.

To sum up, what states are not right-to-work states?

There are 23 US states in total that do not have right-to-work laws.

The following is a list of states that are not right-to-work states:

• Alaska,
• California,
• Colorado,
• Connecticut,
• Delaware,
• District of Columbia,
• Hawaii,
• Illinois,
• Maine,
• Maryland,
• Massachusetts,
• Michigan,
• Minnesota,
• Montana,
• New Hampshire,
• New Mexico,
• New York,
• Ohio,
• Oregon,
• Pennsylvania,
• Rhode Island,
• Vermont, and
• Washington.

What is the history of right-to-work laws?

Originally, the phrase “right to work” was coined by French socialist leader Louis Blanc long before the first right-to-work law was ever enacted. 

According to research on the history of right-to-work claims, Louis Blanc believed that society — that is, the state — should provide employment to everyone. He also believed that every man should have a “right to work.”

In the early 1940s, the term “right to work” was popularized by Vance Muse, a Texas businessman and conservative lobbyist. He started the “right to work” movement with the idea of fighting unionization of the workers in the US. 

On July 5, 1935, former president of the US, Franklin Roosevelt, signed the National Labor Relations Act — better known as the “Wagner Act.”

According to the National Archives, the motive behind the Wagner Act was to give certain freedom to employees such as “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in concerted activities for the purpose of collective bargaining or other mutual aid and protection.” 

In 1947, the law called the “Taft-Hartley Act” was enacted, whose purpose was to modify the Wagner Act by further regulating unions.   

As the National Labor Relations Board states, the Taft-Hartley Act was supposed to protect workers from certain “unfair practices by unions” such as coercion or discrimination by unions. 

According to the US Representative Joe Wilson’s office, in February 2023, Congressman Joe Wilson reintroduced the National Right to Work Act to Congress. With this act, Wilson wanted to ensure the freedom of choice for all US employees regarding union membership and paying union dues. 

However, this act still hasn’t become an official US act.

Right-to-work vs. at-will employment laws — how do they differ? 

According to the Bureau of Labor Statistics, at-will employment is a legal doctrine indicating that “people should be free to enter into employment contracts of a specified duration.” However, it also indicates that either employer or employee can terminate such a contract for any reason, at any time, unless there’s an employment agreement to state otherwise.

While right-to-work laws protect employees against being forced to join a union during their employment, at-will employment laws give both employers and employees certain rights upon the termination of employment.

Who is covered under right-to-work laws?

According to the National Labor Relations Board, most private-sector workers are covered by the National Labor Relations Act. This act is only applicable on a federal level. 

To be more specific, the NLRA refers to most private-sector employers, such as:

• Manufacturers,
• Retailers,
• Private healthcare facilities, and others.

The US employees who work for these private-sector employers have the right to choose whether they want to form or join a labor union at their workplace or refrain from joining it. In other words, their decision doesn’t affect their employment.

On the other hand, the NLRA does not cover:

• Workers that are employed by federal, state, or local government,
• Agricultural workers,
• Independent contractors, 
• Workers that are employed by a parent/spouse, and others.

As for those workers not covered by the NLRA, their right-to-work laws vary from state to state, as we already explained in the table above. These right-to-work laws define whether a certain employee may have to join a labor union as a condition of employment or pay union fees, for instance.

When it comes to paying union dues and fees, the rights of the US workers depend on:

• State laws, and 
• Courts’ decisions. 

Moreover, under the NLRA, employers have the right to enter into agreements with labor organizations, such as all-union agreements. These agreements may require all employees in a bargaining unit to pay fees to a labor union or even become union members.

Do I have the right to work in the US?

Whether you have the right to work in the US or not mainly depends on your work authorization, that is, whether you’re eligible to work in the US or not. 

Being work authorized means that you’re legally allowed to be employed in the US.

Furthermore, US citizens, whether they were born in the US or not but have acquired US citizenship, are automatically authorized to work in the US. 

On the other hand, if you’re not a US citizen, you may still be able to work legally in the US, but under certain conditions. 

As the United States Citizenship and Immigration Services explains, you may be authorized to work in the US if you have an employment-based immigrant visa, for instance. With this type of visa, you can work in the US permanently.

Then again, if you intend to work in the US for a certain period of time, you may apply for a nonimmigrant visa. 

As the US Department of State’s Bureau of Consular Affairs also adds, it’s up to either the US embassy or consulate where you apply for a visa to decide what type of visa you qualify for.   

Right-to-work states — Conclusion and disclaimer

If you work in the US and want to know if you’ll need to join a union or pay union dues and fees at your workplace as a condition of employment, be sure to check:

• What your rights under the federal law (the NLRA) are and whether you’re covered by it, and
• If the state you live in has its own right-to-work law.

We hope our right-to-work states guide for 2023 has helped you better understand the concept and regulations regarding right-to-work laws in the United States.

To get more information on right-to-work laws and other labor laws for each state:

• Follow the links provided as sources at the end of our guide, and
• Visit the State Labor Laws section of our website.

Please bear in mind that this article was written in Q4 of 2023. Thus, it may not include changes introduced after it was published. 

We strongly advise you to consult the appropriate institutions and/or certified representatives before acting on any legal matters.

Clockify is not responsible for any losses or risks incurred should this guide be used without legal guidance.

Sources for the table:

States with right-to-work laws:

Alabama Legislature

Arizona Revised Statutes

Arkansas Bureau Legislative Services

Florida Legislature

Georgia Department of Labor

Idaho State & Federal Resources for Business

Indiana Department of Labor

Iowa Legislature

Kansas State Legislature

Kentucky Government Official Website

Louisiana State Legislature

Mississippi Secretary of State

Missouri Senate

Nebraska Legislature

Nevada Legislature

New Jersey Legislature

North Carolina General Assembly

North Dakota Legislative Branch

Oklahoma Senate

South Carolina Legislature

South Dakota Legislature

Tennessee Government Official Website

Texas Attorney General’s Office

Utah Legislature

Virginia Law

West Virginia Legislature

Wisconsin State Legislature

Wyoming Legislature

States with no right-to-work laws:

Alaska Governor’s Office

California Legislature

Colorado Legislature

Connecticut General Assembly

Connecticut’s Official State Website

DC Office of the City Administrator

District of Columbia Code 

Delaware Code

Hawaii Department of Labor and Industrial Relations

Hawaii State Legislature 

Illinois Statutes

Maine Legislature

Maryland Labor Relations Board

Maryland General Assembly

Maryland State Labor Relations Board

Massachusetts General Court

Massachusetts General Law

Massachusetts Legislature

Michigan Legislature

Minnesota Legislature

Minnesota Revisor’s Office

Montana Code Annotated

Montana Government Official Website

New Hampshire City of Concord

New Hampshire Public Employee Labor Relations Board

New Mexico Legislature

New York State Public Employment Relations Board

NYS Public Employment Relations Board

Ohio Laws

Ohio Legislative

Ohio Legislature 

Oregon Legislature

Pennsylvania General Assembly

Rhode Island General Assembly

Rhode Island Legislation

Vermont General Assembly

Vermont Legislature

Washington Legislature

Washington State Legislature

To ensure you’re fully protected from overworking and being improperly compensated for hours worked, you need to understand overtime laws on both the federal and state levels.

This article covers:

• Definition of overtime laws,
• Federal overtime regulations,
• Overtime laws by state for 2023, and
• Additional overtime provisions. 

What are overtime laws?

Overtime laws are rules that determine payment, limits to working hours, and other types of regulations regarding the hours worked beyond the regular workweek or workday.

In most states, a regular workweek consists of 40 hours of work within 168 consecutive hours. 

The US Department of Labor defines hours worked as “all time an employee must be on duty, or at the place of work.”

Overtime laws ensure workers are properly reimbursed for working longer hours. Overtime regulations protect workers from being overworked and underpaid. 

Overtime laws by state 

The following table shows US overtime laws by state.

It contains information on whether a specific state has its own overtime law or relies completely on federal regulations. Moreover, the table shows daily or weekly limits set for regular working hours. 

Every hour worked above the daily or weekly limit set counts as overtime. 

The table below shows info on overtime laws for permanently inhabited US territories.

All US states have a weekly overtime limit, meaning that an employee can work more than 8 hours on some days and they still won’t be paid overtime if their weekly number of hours worked is below the limit. 

However, some states, such as Alaska, California, Colorado, and Nevada, have limits on the number of hours an employee works in a day before their time is calculated as overtime. So, even if employees work fewer hours than their weekly limit, any hour worked beyond 8 hours a day is considered overtime. 

Furthermore, certain states regulate the number of days a regular workweek consists of. For instance, in California and Kentucky, a workweek consists of 6 consecutive days. Every hour worked on the 7th consecutive day counts as overtime. If an employee works on the 7th consecutive day, their work is considered overtime regardless of the number of hours they worked on the days prior. 

What are the federal overtime laws?

According to the FLSA overtime regulations, all covered employees have to receive pay for overtime work. Federal regulations define overtime as time worked over 40 hours during a workweek. 

The rate for overtime is one and a half times the regular hourly pay rate:

Hourly rate x 1.5 = overtime rate

FLSA covers employees working in the following organizations:

• Companies with sales volume or business done of at least $500,000, and
• Businesses providing medical or nursing care, hospitals, schools, and government agencies.

Furthermore, workers involved in interstate commerce and domestic service employees are also covered by the FLSA.

Who is exempt from overtime pay in the US?

Exempt employees are those who are ineligible for overtime pay even if they work beyond the weekly or daily overtime hours cap.

The FLSA also has an extensive list of exemptions regarding the coverage of employees. 

Most overtime exemptions fall under these categories:

• Executive exemption, 
• Administrative exemption, 
• Professional exemption,
• Computer employee exemption,
• Outside sales exemption,
• Blue-Collar workers, and
• Highly compensated employees. 

For each exemption category, the FLSA further defines requirements that must be met for an employee to be considered exempt. The requirements mainly include the type of job performed, job duties, and salary level. However, for more specifics on each exemption category it’s always best to consult with the official FLSA website.

FAQs about US overtime laws

In case you’re still wondering about specifics regarding overtime, we’ve compiled some of the most frequently asked questions on overtime laws and answered them for you.

1. When did overtime start in the USA?

The first official overtime regulation on the federal level came with the passing of the Fair Labor Standards Act (FLSA). The act came into effect in 1938 and it contained provisions on minimum wage, child labor, and overtime pay.

Initially, the FLSA defined overtime as any hours worked above a 44-hour workweek. Two years later, the FLSA issued an amendment reducing the limit to a 40-hour per week. 

In fact, over the years, the FLSA overtime regulations were amended multiple times. The amendments mainly changed overtime exemptions — particularly the ones concerning salary levels for exempt employees. 

2. What states have the best overtime laws?

Overtime laws are similar in most states since most of them follow the FLSA 40-hour rule. However, some states have introduced their own state regulations on daily and weekly overtime — making their overtime conditions better than in other states.

In states with weekly overtime rules only, workers could work however many hours in a day is required, and they still wouldn’t be reimbursed for overtime if their weekly hours worked didn’t add up to more than 40 hours. 

By setting daily overtime regulations, these states have ensured their workers are adequately compensated for each hour worked beyond their regular working hours. 

States with daily overtime rules are:

• Alaska,
• California,
• Colorado, and
• Nevada. 

3. How to determine whether state or federal overtime laws apply?

Defense attorney and partner at Schmidt and Clark LLP, Mike Schmidt, explains that the federal law applies to FLSA-covered employees:

“Generally, it depends on two main factors: the type of work you do and your employer’s annual revenue. If your job involves activities like interstate commerce, production of goods for interstate commerce, or if you work for a company with an annual revenue of at least $500,000, then federal overtime laws, outlined in the Fair Labor Standards Act (FLSA), are likely to apply.”

Schmidt adds that, in case an employee isn’t covered by the FLSA or lives in a state with its own overtime regulations, they have to look into the state law as these regulations might be more favorable:

“Some states have their own overtime laws that might be more generous to employees than federal laws. For instance, California has daily overtime laws, which means you could be entitled to overtime pay if you work more than a certain number of hours in a single day, regardless of your weekly total.”

4. How does overtime work in California?

In California, hours worked beyond 8 hours a day are considered overtime. The overtime rate per hour is 1.5 times the regular hourly rate for work beyond 8 hours and up to (and including) 12 hours a day.  

Moreover, if an employee works 12 hours or more a day, their overtime rate is 2 times the regular hourly rate after 12 hours of work. 

In addition, the regular workweek consists of 6 days in California, meaning that working on the 7th consecutive day counts as overtime. 

The first 8 hours worked on the 7th day are paid 1.5 times the regular hourly rate, while hours worked beyond 8 hours are compensated at 2 times the regular hourly rate.  

5. How is overtime calculated based on federal regulations?

On the federal level, every hour beyond the 40-hour workweek is reimbursed at the rate of 1.5 times the regular hourly rate. 

Let’s say your hourly rate is $30, and you worked 42 hours during a week. That’s 40 regular working hours and 2 additional hours of overtime tracked. Your weekly pay for regular hours worked will be:

$30 x 40 hours of regular work = $1,200

And your pay for overtime is:

$30 x 1.5 (the overtime rate) x 2 hours of overtime = $90

So, your total earnings for that week will be:

$1,200 + $90 = $1,290 

Overtime work is calculated differently in states that allow a longer regular workweek (above 40 hours), such as Kansas and Minnesota. Moreover, in states with daily overtime, you should also be mindful of the hours worked during the day. 

6. How to calculate overtime in states with daily overtime?

In states with daily overtime, any hour worked beyond 8 or 12 hours per day (depending on the state) is considered overtime. This means employees can be paid for overtime even if they don’t work more than 40 hours during the week. 

Let’s assume that an employee in Nevada who is paid an hourly rate of $40 worked 8 hours on Monday, Tuesday, and Wednesday, 10 hours on Thursday, and 6 hours on Friday. 

Their hours worked during the week are:

8 hours x 3 days + 10 hours + 6 hours = 40 hours

So, looking at the weekly overtime limit in Nevada only, we might conclude that this employee isn’t eligible for overtime pay, as they didn’t work more than 40 hours during the week. 

However, Nevada’s overtime regulations include daily overtime with the limit set to 8 hours a day. This employee worked 10 hours on Thursday, which means they worked 2 hours overtime and are eligible for overtime pay.

So, we’ll calculate their weekly pay by first adding up regular hours worked:

8 hours x 4 (Mon-Thu) + 6 hours (Fri) = 38 hours

Their pay for regular hours worked is:

38 hours x $40 = $1,520

Then, we should add the overtime. The overtime hourly pay for this worker is:

$40 x 1.5 = $60

An employee worked 2 hours of overtime on Thursday:

2 hours x $60 = $120

Their weekly earnings are:

$1,520 + $120 = $1,640

So, this employee earned a total of $1,640 during the week in question. 

7. How much overtime is too much? 

Federal regulations do not impose a limit on the overtime hours an employee aged 16 or above can work. 

However, certain states have regulations that limit the number of working days in a week to 6. These states are:

• Illinois,
• New York (for certain occupations),
• Wisconsin (minors and workers in factory and retail establishments), and
• California (with exceptions).

Furthermore, in California, workers have the right to refuse to work more than 72 hours a week without being sanctioned. 

In addition, in Maine, employees can’t work for more than 80 hours of overtime in a consecutive period of 2 weeks. 

8. Is overtime mandatory in the US? 

Overtime work is not mandatory in the United States. But, reimbursing workers properly for working overtime is mandatory, according to the federal overtime law.

9. Is unpaid overtime illegal in the US?

Yes, it is illegal not to pay the overtime rate to a US employee who worked overtime in a specific week. 

This regulation, however, applies only to covered, non-exempt employees. 

10. Do salaried employees get overtime in the US?

Most salaried employees in the United States fall under overtime exemptions. This means that they’re excluded from the federal overtime regulations and not eligible for overtime pay.

However, as of 2023, most salaried white-collar workers (executive, administrative, professional, and outside sales employees) who make less than $684 per week, which is $35,500 yearly before taxes, are eligible for overtime pay.

→ Note: This is just an informatory text. For more information on exemption categories and criteria, visit the official FLSA website.  

Overtime laws by state — conclusion and disclaimer

Hopefully, our guide helped you understand federal and state overtime laws in the United States.

You can get more information on overtime laws for each state by following the official links:

• Provided as sources at the end of this article, and
• Used as sources in the State Labor Laws.

Please bear in mind — this article was written in Q4 of 2023. Thus, it may not include changes introduced after it was published. 

We strongly advise you to consult the appropriate institutions and/or certified representatives before acting on any legal matters.

Clockify is not responsible for any losses or risks incurred should this guide be used without legal guidance.

Sources for the tables:

US states:

• Alabama Department of Revenue
• Alaska Department of Labor and Workforce Development
• Arizona State Legislature
• Arkansas Department of Labor and Licensing
• BOLI Oregon
• Colorado Department of Labor and Employment
• Commonwealth of Massachusetts
• Connecticut Department of Labor
• Delaware Department of Human Resources
• DOL Georgia
• Guide to Idaho Labor Laws
• Illinois Department of Labor
• Indiana State Personnel Department
• Iowa Department of Administrative Services
• Kansas Department of Labor
• Kentucky Education and Labor Cabinet
• Louisiana State Civil Service
• Maine Legislature
• Maryland Department of Labor
• Michigan Department of Labor and Economic Opportunity
• Minnesota Department of Labor and Industry
• Mississippi Department of Employment Security
• Missouri Department of Labor and Industrial Relations
• Montana Department of Labor and Industry
• Nebraska Department of Labor
• Nevada Department of Business & Industry
• New Hampshire Department of Labor
• New Jersey Department of Labor and Workforce Development
• New Mexico Courts
• New York State Attorney General
• North Carolina Department of Labor
• North Dakota Wage & Hour Questions
• Office of the Attorney General for the District of Columbia
• Ohio Laws and Administrative Rules
• Pennsylvania Department of Labor & Industry
• South Carolina Department of Agriculture
• South Dakota Department of Labor & Regulation
• State of California Department of Labor and Industrial Relations
• State of Hawaii Wage Standards Division
• State of Oklahoma Office of Management and Enterprise Services
• State of Rhode Island Department of Labor and Training
• Tennessee Department of Human Resources
• Texas Government Code
• The Florida Senate
• Utah State Legislature
• Vermont Department of Labor
• Virginia Legislative Information System
• Washington State Department of Labor & Industries
• West Virginia Division of Labor
• Wisconsin Prevailing Wage Laws
• Wyoming Workforce Services

US territories:

• Department of Labor, Government of Guam
• Federal minimum wage in American Samoa
• Federal minimum wage in the Commonwealth of the Northern Mariana Islands
• US Virgin Islands Department of Labor 
• US Wage and Hour Division, Puerto Rico

This guide will help you understand how calculating federal taxes works, but at the same time, our free calculator will help you estimate taxes for the current filing year. 

While we are on the subject of taxes, to be able to calculate federal tax withholdings, make sure you have your Form W–4 close by to follow the guidelines below and fill in the necessary information accordingly. Form W–4 will help you have a better insight into your filing status, dependents, multiple jobs (if you have them), or any other necessary information.

What is federal income tax?

Levied by the IRS, federal income taxes are taxes all individuals, businesses, and legal entities have to pay based on their annual earnings (including salaries, wages, tips, etc.) Federal income tax rates range from 10% to 37% and depend on the taxpayer’s filing status and annual income.

The government uses the money collected from taxes to fund the economy of each state. In other words, tax revenue is used for education, health, transportation, infrastructure, etc.

How does federal income tax withholding work?

Employees must be aware of federal income taxes withheld from their paychecks — such taxes are withheld by the employer from each paycheck. 

The amount of those deductions largely depends on:

• Your income, and 
• Information in your Form W–4.

Form W–4 is the IRS document where you will provide information such as your:

• Filing status,
• Number of dependents,
• Number of children,
• Additional jobs,
• Allowances, etc.

Each time you start a new job or go through any changes that would affect the Form W–4 information — such as, for instance, changing your address — it’s your responsibility to adjust your Form W–4 accordingly.

Bear in mind that by filling out your Form W–4 accurately, you can avoid overpaying or even owing money to the IRS during tax season.

What does federal income tax withholding include?

Employees may see two types of federal taxes on their paychecks:

1. Federal withholding, and 
2. Federal Insurance Contributions Act (FICA) withholding.

Federal withholding

Federal withholding mainly depends on your income and filing status — i.e. the amount you earn and the information you provide on Form W–4. 

To calculate your income tax withholding, look at the chart below and determine your tax brackets first. Tax brackets indicate the tax rate you must pay on each part of your income.

Federal withholding tax brackets 2023

So, for instance, a single taxpayer who earned $40,000 in 2022 will pay 10% of the first $11,000 of that income, and the next (and last) portion will be taxed at 12%. This tax system is called the progressive tax system, which means that the more you earn, the higher the tax rate you will have to pay.

FICA withholding

Apart from income tax withholding, FICA taxes are also deducted from each paycheck. By paying FICA taxes, you contribute to your Social Security and Medicare funds which you will be allowed to use after you retire.

The following are withholding rates regarding both: 

• Social Security taxes — The total tax rate is 12.4% (6.2% is paid by the employer and 6.2% by the employee up to the taxable maximum of $160,200 for 2023), and
• Medicare taxes — The total tax rate is 2.9% (1.45% is paid by the employer and 1.45% by the employee).

Self-employed individuals pay the combined employee and employer amount  — 12.4% Social Security tax (on up to $160,200) and 2.9% Medicare tax (on the entire net earnings). Moreover, self-employed individuals whose earnings exceed $200,000 pay an additional 0.9% in Medicare taxes.

The deductions your taxable income is subjected to 

The above-mentioned taxes are fixed amounts, and you cannot avoid paying them. Luckily, your taxable income is subject to deductions — amounts that may significantly lower your taxable income. This means that you don’t pay taxes on such items.

Taxpayers may choose between 2 types of deductions:

1. Standard deduction — Fixed amount that is based on your age, filing status, or whether you are disabled or dependent (see more information on cases when you can’t use the standard deduction), or 
2. Itemized deduction — Not fixed and includes mortgage interests, charitable contributions, disaster losses, medical or dental bills, etc.

Don’t forget to add deductions in the calculator above — and bear in mind that you can only choose to claim one type of deduction.

Standard deduction

According to the IRS, as of the tax year 2023, the standard deduction ranges are the following:

• For single filers — $13,850,
• For married, filing jointly — $27,700,
• For married, filing separately — $13,850, and
• For head of households — $20,800.

Itemized deduction

People usually choose the standard deduction. However, if you decide to itemize deductions, you must:

• Keep the receipts off all your expenses, and
• List the types and amounts in the Schedule A of Form 1040.

Who is exempt from federal income taxes? 

Still, there are some circumstances when certain individuals or organizations are freed from paying federal income taxes, and they are considered tax-exempt.

The following are tax-exempt individuals or organizations:

• Nonprofit organizations — Religious, humanitarian, the Red Cross, churches, etc.
• Low-income taxpayers — Individuals who are not required to pay taxes since their earnings are below the tax threshold, meaning their income is not higher than the standard deduction. For instance, a single taxpayer under 65 years of age who earns less than $12,950 a year is considered a low-income taxpayer — according to the Tax Year 2022 Filing Thresholds by Filing Status.
• Individuals who qualify for the Earned Income Tax Credit (EITC) — Eligible individuals are those with low to moderate incomes (with or without dependents), and the credit amount depends on their filing status and the number of qualifying dependents. The said credit lowers the amount of taxes owed to the government.
• US citizens or resident aliens of the United States working in a foreign country — According to the Foreign Earned Income Exclusion, such individuals are not required to pay taxes on income of up to $120,000 earned working abroad (for the year 2023).

Federal taxes — summary

The following is a breakdown of federal taxes that apply across the US and concern employees and employers.

Employees are responsible for paying:

• Federal income tax — The tax rate depends on your earnings and the information you provide on your W–4, 
• FICA taxes — Consist of Social Security tax (employees’ share is 6.2%) and Medicare taxes (employees pay 1.45%), and
• Self-employment tax (SE) — This tax applies to the self-employed and amounts to 15.3%.

On the other side, employers are required to pay:

• FICA taxes — 6.2% for Social Security, 1.45% for Medicare taxes, and
• Federal Unemployment Tax Act (FUTA) — The tax rate equals 6% and applies to the first $7,000 of employees’ wages.

Finally, both employers and employees are required to pay:

• FICA taxes — They equally pay FICA taxes that consist of Social Security taxes and Medicare taxes each paying 7.65% for every payday (Social Security tax: 6.2% and Medicare tax: 1.45%).

Federal paycheck calculator conclusion/disclaimer

We hope you find this federal paycheck calculator and accompanying explanations helpful. We advise you to pay attention to the information we’ve highlighted and the links we’ve provided, to make sure you calculate your federal withholdings correctly. 

Please note that this calculator was created in Q2 2023, so any changes regarding tax brackets or related regulations that were included later than that may not be included in this guide. 

Bear in mind that the results you get using our calculators may not be entirely accurate or complete and there might be deviations. We strongly advise you to consult with the appropriate institutions and/or certified representatives before acting on any legal matters.

Clockify is not responsible for any losses or risks incurred should this guide (or its calculators) be used without further guidance from legal or tax advisors.

Nowadays, taking care of your mental health is perfectly normal, and the stigma surrounding it is extinguished. 

In fact, the World Health Organization notes that around 12 billion working days are lost every year to mental health issues, either due to absence from work or lack of productivity.

Many organizations and employers around the world understand how a mental illness can affect an employee’s overall wellbeing, which has led to introducing mental health leave of absence.

Therefore, many employees might want to know the following:

• What is a mental health leave of absence?
• How do you recognize you need a mental health leave?
• What are your options for taking such leave?
• How do you ask for a mental health leave?
• Why should you take a mental health leave?

What is a mental health leave of absence?

Simply put, a mental health leave of absence represents time off from work (paid or unpaid) that employees use to deal with an underlying mental condition.

Generally, such leave is characterized by taking the time to: 

• Diagnose the mental condition at hand,
• Seek professional treatment,
• Treat the mental condition, and
• Recuperate.

Most employees that are eligible for taking a mental health leave do so for self-treatment, but nowadays, many employers and institutions include policies that allow employees to take the said leave to take care of a family member with a mental condition.

For that purpose, eligible employees may use the US Family and Medical Leave Act (FMLA) to take a mental health leave. This act protects all employees across the states, whether they’re struggling with a physical or mental disease.

It is important to note, however, that the FMLA provisions apply when the condition in question is “serious.” 

According to the FMLA, a serious condition may involve:

• Inpatient care (hospital treatment that requires admission), or
• Continued treatment by a healthcare provider.

However, there are different types of labor laws and provisions that protect employees across the world where different conditions apply, but we’ll talk more on that in the following paragraphs.

Mental health statistics in the workplace

Before we go into details regarding the intricacies of mental health leaves of absence, it might be good to go through some statistics regarding mental health issues in the workplace, and how mental disorders affect employees all around the world:

• In June 2022, the World Health Organization published an extensive report that serves as an overview of mental health issues globally. The statistics in the report show that 15% of all employees have a diagnosed mental disorder.
• Not showing up for work and losing valuable working hours due to taking mental health leave ultimately costs money. According to the World Health Organization, mental disorders cost the global economy over $1 trillion in lost productivity annually.
• A study found that working women are two times more likely to have a common mental health problem than employed men — 19.8% vs 10.9%.
• According to a post-pandemic survey conducted in 2021, 87% of employees reported they believe that employers could help minimize the effects of stress they deal with on a daily basis.
• Due to the stigma surrounding mental health issues, most workers are generally not open to talking about the physical illnesses and issues they might face. On the other hand, according to a study from OHW+, only 14% of employees are open to discussing their mental health issues in the workplace.

How do you recognize you need mental health leave?

In one way or another, we all go through different types of mental difficulties on a daily level. That can be stress and anxiety over work or something more extreme, such as diagnosed mental disorders.

Once you feel like your work is suffering and you cannot focus on the task at hand, this may be a sign you need a leave of absence. But, how do you know for sure?

You can oftentimes recognize that someone is battling with a debilitating mental illness through physical and emotional signs. Some could seem harmless, while others can be cause for alarm.

If we’re talking about physical signs, some of the most common ones include:

• Weight fluctuations (major changes in eating habits/frequency),
• Lack of energy (tiredness),
• Various and frequent headaches,
• Nausea, and
• Changes in sex drive.

However, since most of these signs could point to something else, people tend to disregard them as symptoms of a mental illness. 

On the other hand, emotional symptoms are usually direct indicators that an underlying mental disease could be the root of your problems.

The most frequent emotional signs of a mental disease include:

• Mood changes,
• Sensitivity or apathy,
• Irritability,
• Sleep cycle fluctuations,
• General stress and anxiety, and
• Uncharacteristic behavior.

Still, diagnosing a specific disorder from these symptoms is highly unlikely since many mental diseases exhibit in similar manners. Therefore, it’s important to note to visit a doctor to determine what the disease in question is.

On that note, the World Health Organization (WHO) finds the following as some of the most common mental disorders:

• Anxiety disorders,
• Depression,
• Bipolar disorder,
• Post-Traumatic Stress Disorder (PTSD),
• Eating disorders, and
• Disruptive behavior and dissocial disorders.

In any case, the first step to determining what the underlying problem is should be visiting a doctor’s office and performing all the necessary tests. Once the root of the problem is diagnosed, it’s time to focus on getting better and taking a break.

Can you take time off of work for mental health?

Most countries around the world offer the most generalized sick leave (paid or unpaid) to their employees to tend to their health. Now, depending on the place of your employment, laws and policies will vary, and employers do have a say in some regulatory measures.

Still, physical health has the upper hand when it comes to sick days and leaves of absence, but mental health is slowly catching up, as is the case with US and FMLA. Some of the more advanced countries in the world have taken measures to ensure that no differentiation has been made between the two, such as the UK.

For example, a UK employee has the right to take up to 28 weeks of unpaid leave per year to tend to a disease, whether it’s physical or mental.

Also, Dutch employees are entitled to 70% of their paycheck during sick leave that can last up to 2 years with no repercussions. The Dutch government sick leave policy makes no distinction between physical or mental wellbeing when it comes to absence from work.

Furthermore, there are 12 US states that offer state-approved paid FMLA plans for employees and/or their loved ones that deal with mental issues.

All in all, your work contract will probably state if your employer offers any days for mental health issues, so checking with them is your best option.

How long can you take off of work for mental health reasons?

The exact number of days you can be absent from work depends on two factors:

• Country/state policies regarding mental health, and
• Employer-set policies.

Also, an important factor that can affect your absence is the disease itself. If continuous treatment is necessary for your type of disease and you cannot work until it is completed — i.e. you’re not capable of working — most policies will classify you as “incompetent to work” and you’ll be granted sufficient time to recuperate and get back to work.

Again, your contractual obligations set by the employer might state otherwise, which is why you should always contact your HR or your employer directly.

What are your options for taking time off of work for mental health reasons in the US?

Mental issues pose physical problems, and most physicians will list out the physical symptoms as the “culprits” for your leave of absence. If your place of employment does not include mental health conditions for leave of absence, the doctor’s note will most probably include a physical condition that could grant you a temporary leave.

However, this will not always be the case, and you’ll have to resort to mental health leave policies. Some of the most common policies in the US include:

• Federal Family and Medical Leave Act,
• State Family and Medical Leave Act,
• Employer-set mental health leave of absence policy, and
• Premium insurance policies.

Federal Family and Medical Leave Act

As previously mentioned, the FMLA entitles all eligible employees to take job-protected unpaid leave of absence for family-related reasons, or in our case, a mental health condition. Under Fact Sheet #280, a mental illness is considered a serious illness, and therefore, employees can use the FMLA to tend to diagnosing and treating a mental condition.

Under the FMLA, an employee can take time off to tend to:

• A serious illness (characterized by inpatient care and/or continued treatment) that renders them incapable of performing the essential functions of their job (12 weeks),
• Take care for a family member with a mental health condition (12 weeks),
• Take care for an adult child with a mental health condition (12 weeks), and
• Take care of a covered service member and eligible veterans with a serious illness (26 weeks).

It should be noted that the eligibility for taking time off under FMLA for mental reasons is the same as for physical conditions, which include that:

• The employee has worked for a covered employer for at least 12 months,
• The employee has completed at least 1,250 working hours in the span of 12 months, and
• The employee works in a location with 50 other employees within 75 miles.

State Family and Medical Leave Act

The FMLA applies to all US employees but if the state plan offers more benefits to the employee, it will take precedence.

In fact, there are 12 US states at the moment that offer paid Family and Medical Leave Act that includes mental health absences:

• California, 
• Colorado, 
• Connecticut, 
• Delaware, 
• Maine, 
• Maryland, 
• Massachusetts, 
• New Jersey, 
• New York, 
• Oregon, 
• Rhode Island, and 
• Washington.

Still, eligibility for each of these states differ, and you should check your local labor laws to find out more information regarding mental health leave of absence.

Employer-set mental health leave of absence policy

Many employers offer benefits and extended leaves of absence when it comes to mental health. That’s why you should always talk to your employer first and see if the employer-set policy offers better benefits than the FMLA.

For example, famous names such as Microsoft, Walmart, and Nike offer paid vacation and personal days for employees struggling with stress and overwork.

Premium insurance policies

Unfortunately, the US FMLA does not require employers to offer paid leave of absence, which is why many employees resort to paying premium insurance policies that include mental health protection. It’s not the best solution, but it does offer some financial support in times of need. 

How to tell your boss you’re struggling and ask for a leave of absence?

After diagnosing the problem and choosing the right option for your leave of absence, the next natural step is to tell your boss and ask for the said leave.

So, what is the best approach?

The first step should be realizing you’re both human and full of understanding. It might seem cliche, but it’s in your boss’ best interest that you are healthy and ready for work. However, bear in mind that there are certain expectations from you as an employee, which is why finding a compromise should be your top priority.

Therefore, plan out the conversation in advance and think of the following:

• How comfortable are you to speak about your mental issues?
• Is the work itself the problem or is it an external factor?
• Can you find a way to help yourself and your employer?

Since it almost always depends on the situation at hand, there is no definitive answer on how to approach the conversation, but hopefully, these questions will lead you in the right direction.

However, when it comes to asking for the leave itself, there are a couple of tips that should help you.

Tip #1: Be honest

Naturally, talking about your health problems is hard, especially if you’re struggling mentally. However, you need to understand that what’s said between you and your employer, stays between the two of you under the confidentiality of your employment contract.

Also, honesty in such situations could be the best approach since it evokes empathy and respect for being candid, and it will almost always pan out.

Tip #2: Be respectful

Asking time off for a projected period of time is reasonable, but do not abuse your position. If, for example, your physician believes that the treatment shouldn’t last for more than 2 months, ask your employer for a 2-month leave of absence.

Reaching a compromise will go a long way to establishing trust with your employer, and it will also strengthen your relationship, which will surely come handy in the future.

Tip #3: Choose a specific time to ask for a mental health leave

It might seem arbitrary but choosing the right time to speak with your employer could be beneficial, especially if you’re asking for an employer-set policy leave. Request the meeting when the workload is light and find a private area to discuss your leave.

Tip #4: Prepare the necessary documents for your leave

If your boss is stickler for the rules and regulations or simply wants to know if everything you claim is legitimate, you should have all your medical documentation ready. 

This could include:

• Doctor’s notes,
• Prescriptions, and
• Inpatient documentation (if any).

Tip #5: Delegate your tasks

Even if you already suspect that your employer will approve your leave of absence, it might not be a bad idea to find a colleague that will cover some of your responsibilities while you’re away. Such action could show resolve and determination that your boss will appreciate and you’ll return the favor to your colleague in the future.

What can you do on your mental health leave?

Needless to say, the most important thing is to take care of yourself and focus on your or a family member’s wellbeing. On the other hand, taking a prolonged leave gives you time to focus on some other aspects of your health and life.

Tip #1: Take care of your physical health

Improving your immune system and your overall physical health will do wonders for your mental health as well. Working out, detoxing, and taking vitamins could be the way to improving your health score.

In fact, a study from the National Center for Biotechnology states that regular physical exercise can have mental health benefits, including:

• Better sleep,
• Stress relief,
• Increased energy,
• Weight reduction, and
• Reduced tiredness.

Tip #2: Find a support system

You can use the extra time you have on your hands to join a support group for mental illnesses. Of course, it all depends on the type of condition you have but it’s always a good idea to talk with other people and hear what they are going through.

Furthermore, building a strong system of support and people around you will help you deal with the problem you’re trying to solve.

Tip #3: Reconnect with your family and friends

Spending time around loved ones is always good for the mind, no matter the mental condition. 

In fact, being around people you care about goes a long way in:

• Reducing your stress levels,
• Boosting your self-esteem, and 
• Eliminating loneliness.

How do you explain absence due to mental health?

Naturally, your colleagues will wonder where you are, especially if you have a relationship with them outside of work. On the other hand, dealing with mental health issues is a big part of your privacy, which is why there has to be a middle ground, in terms of what you should and shouldn’t share.

Here’s some advice on what you can say or do in such situations.

Advice #1: Share what you’re comfortable with

In most cases, you’re obligated to notify your superior and HR on the exact nature of your mental health issue and your leave of absence. However, you don’t have to be as specific with your colleagues if you don’t feel comfortable.

If you feel embarrassed or uncomfortable speaking about your condition, simply say you’ve taken some personal time to tend to private issues.

Advice #2: Write a letter to your colleagues

Writing your thoughts and emotions might seem over the top but it can be helpful in expressing yourself and letting others know how important the upcoming period is to you.

Furthermore, writing a letter eliminates the need for live conversation, which can help you open up and be more relaxed while talking about your issues — if you choose to share the details.

Advice #3: Ask for discreetness

If you work in a large company, it’s only natural that you don’t want everyone to know what you’re going through. In that case, you will probably share the details with the colleagues you talk or see on a daily basis.

If you have a solid relationship with them, be honest and ask them to be discreet with the information you’ll share with them.

Frequently Asked Questions regarding mental health leave

Finally, we come to the FAQ section with some of the most common questions you might want to read about mental illnesses and employee leaves. 

Can mental health leave be paid?

Depending on your place of residence and employment, yes, your mental health leave could be covered by:

• Your health insurance,
• Your employer, or
• State-issued mental health plan, such as FMLA.

However, you should always read your work contract and check with your employer before you ask for the leave of absence.

Can mental health leave be part of employees’ compensation?

If a strong case can be made that working conditions have caused the mental illness or condition, you could be eligible for compensation. Still, such cases are rare, and they usually depend on various factors, such as:

• State and place of employment,
• Type of work,
• Working conditions, and
• Employer policies.

What famous companies provide mental health leave?

Naturally, most employees wish to work for top companies that offer the best benefits. Since mental health importance is slowly picking up, the “top” companies have started offering both mental health days and leave of absence in some cases.

Some of the most popular names you’ve probably heard of include:

• Nike,
• Walmart,
• Pinterest,
• Microsoft,
• Drip,
• Linkedin, and
• SAP.

Of course, the absolute list is much longer, so if you’re suffering from a mental disease and you’re applying for a job, make sure to check with the HR department if the company offers mental health leave of absence.

What are some of the most common reasons for taking mental health leave of absence?

As we previously mentioned, according to WHO, some of the most common mental health issues for taking a leave of absence include:

• Anxiety,
• Depression,
• Burnout,
• Stress,
• Bipolar disorder,
• PTSD, and
• Disruptive behavior and dissocial disorders.

What is an employee assistance program?

An employee assistance program (EAP) represents a work-based community that offers help to working employees to deal with individual problems and needs.

In most cases, companies and employers hire consultants and professionals that offer courses and counseling sessions for employees in need. Nowadays, such programs exist outside the office, and their purpose ranges from work-related issues and violence to many extreme issues.

Final thoughts: Mental health leave is equally important as any other leave of absence

Recognizing the significance of mental health in their professional lives, employers and employees are embracing the idea that mental health challenges are as valid as physical ones — deserving of attention and support.

Mental diseases are nothing to be ashamed of, and there is no reason to hide them. If you feel like you’re regressing and not giving it your maximum due to illness, it’s time to get help. And, don’t worry, your job will be waiting for you.

But how can contractors and their sidekicks (subcontractors) make it all happen? 

Well, that’s why you’re here.

In this article, we’ll cover:

• What construction bidding is and how it works,
• Why efficient bidding is critical for profit, and
• How to follow some crucial steps in construction bidding for the best results.

Let’s dive right in.

What is construction bidding?

Construction bidding is a procedure where general contractors (GC) submit formal written offers to clients (also known as property owners or project owners) to complete a construction project within a given timeframe. 

In other words, a client asks general contractors to bid on their projects in order to get hired to do a job. In industry slang, experts refer to this as bid solicitation (more on that later). After bid solicitation, the general contractor talks to subcontractors to check their availability and get more detailed information on specialized services, like plumbing or electrical.

As we already mentioned, the terms property owner, project owner, and client are used interchangeably and mean the same thing — the person or entity that solicits, reviews, and approves bids from contractors.

To survive on the market, a construction company has to learn to prepare a competitive contractor bid. But competitive doesn’t only mean the bid with the lowest price. In fact, the word competitive usually entails a carefully crafted blend of cost, profit, and quality.

Thus, the goal of any contractor during construction bidding is to win as many contracts as possible by balancing the following aspects:

• Money they earn from doing the job, 
• Cost of the material and labor, and 
• Quality they deliver to the client.

Contractors submit their bids during tenders, but more on that later. 

Next, let’s take a look at how to differentiate between construction bidding and construction estimating.

Construction bidding vs. estimating

Making a profit in the construction industry is hard. 

According to a report by the National Association of Home Builders, construction companies scored a net profit of just 7% in 2020 (which is the total earnings after deducting all expenses from the income generated). 

To earn more, contractors can’t just bid on more projects — and that’s where bidding and estimating jump on stage. 

Construction estimating is part of construction bidding. More precisely, estimating requires the contractor to forecast expenses for building the structure. After collecting the cost information for labor and materials, the contractor feeds it into their construction bid. In all cases, estimating precedes bidding.

If done wrong, estimating may lead to significant losses after signing the contract with the property owner. For a project to make a profit, here’s a short list of items that need to go into cost estimation:

• Equipment, materials, and labor,
• Feasibility studies,
• Insurance and taxes,
• Field supervision,
• Testing and inspection, etc.

Besides, bidding and estimating require a mutually distinct set of skills. 

For example, the person overseeing the bidding process needs to nurture a strategic mindset and thereby:

• Look at the project from a bird’s-eye view, and
• Set measurable and realistic objectives.

In contrast, the individual in charge of the estimation of costs — also called estimator and cost estimator — has to be a magician in task delegation and project management.

What’s more, smaller contractors often pay one person to handle their contractor bid and estimating procedures. Yet, that’s not the best way to go, especially for large and recurring projects. Construction experts typically recommend hiring separate professionals to handle the bid and estimation.

We created a simple table below to make the major traits of construction bidding and construction estimating more tangible:

Types of construction bids

A construction bid is a series of documents sent to the client for review and approval. Apart from the cost estimation, a construction bid includes the scope of work for the whole project.

Property owners and other clients solicit contractor bids from contractors via 5 bidding types, also called tendering options or tenders:

• Open tendering,
• Negotiated tendering,
• Selective tendering, 
• Serial tendering, and
• Framework tendering.

To clarify, a tender is an invitation to participate in a competition and win a contract. On the other hand, a bid is the contractor’s response to the tender — i.e., the contractor collects documentation needed to compete for the contract.

In short, tenders and bids are 2 sides of the same coin. In the following paragraphs, we’ll cover the 5 tendering options in more detail.

Let’s dive right in.

Construction bid type #1: Open tendering

Open tendering (also called open bidding) means that the property owner invites all interested contractors to submit their bids. Hence its name — open tendering, where anyone can submit a contractor bid.

Property owners usually use open tendering on government projects. 

For larger projects, clients may establish a pre-qualification process to hire the most suitable contractors for the job.

According to Kumar Neeraj Jha, a construction expert and author of Construction Project Management: Theory and Practice, open tendering is a low-stakes game to a certain extent:

“The risk involved in the project is less here. The owner specifies some minimum eligible criteria for issue of the tender document. If these criteria are satisfied by a contractor, the tender document is issued to him.”

Pros of open tendering in construction: 

• Provides greater accountability and transparency than other bid types, and
• Allows up-and-coming general contractors to land their first projects.

Cons of open tendering in construction: 

• Highly competitive as it is open to anyone interested in applying, and
• Sometimes criticized as costly for contractors after they get involved in the tendering process.

Construction bid type #2: Negotiated tendering

With negotiated tendering, the client approaches one contractor to bid on the project. Some of the reasons for this include the contractor’s track record and their previous relationship with the client. In other words, the project owner has more trust that the contractor will do as they claim in their construction bid.

In most cases, clients pick the negotiated tendering option for highly specialized projects, like building factories, warehouses, or power plants.

Unlike open tendering, where everyone gets to take part in the bidding process, negotiated tendering can be anti-competitive and exclusive.

Pros of negotiated tendering in construction:

• A great option for providers of highly specialized construction projects, and 
• In case of security concerns and emergencies, clients prefer negotiated tendering. 

Cons of negotiated tendering in construction:

• Some experts think it lacks accountability due to its exclusivist nature, and
• Leads to a reduction of available jobs to other contractors.

Construction bid type #3: Selective tendering

Selective tendering is a more complex, advanced form of negotiated tendering. Simply put, selective tendering means that the client approaches a select, experienced, and trusted group of contractors to bid on the project. That’s unlike negotiated tendering — where the client approaches a single contractor.

When a restricted number of bidders is invited to bid, the property owner retains the right to select the bids they want — no matter their high prices. We can understand selective tendering as a pre-selection phase of suppliers who compete to win the project.

In fact, selective tendering is the most common type of tendering on private construction projects. Some of the main criteria that clients consider with this type of tendering include:

• Performance on past projects,
• Relationship with the client, and
• Expertise in specific fields.

In any case, a selective tender ensures greater quality control for the client.

Pros of selective tendering in construction: 

• More efficient than open tendering since it takes very little time, and
• Only truly qualified general contractors get an invitation to submit a bid.

Cons of selective tendering in construction:

• May introduce bias since clients are prompted to constantly go back to the same contractors, and
• The price of the contract is typically higher than during open tendering.

Construction bid type #4: Serial tendering

Serial tendering is one of the rarest approaches but still applicable in some cases. Serial tendering happens when the property owner wants to get a series of similar projects done within a specific timeframe. 

A good example of serial tendering is when a housing developer plans to build dozens of residential homes in a single year. To avoid the backbreaking work of selecting bids for every separate project, they opt for choosing just one general contractor to handle all those similar housing contracts.

Pros of serial tendering in construction: 

• Many experts believe it’s less costly for both the client and the contractor, and
• Timely payments by the client due to breaking up payments into increments. 

Cons of serial tendering in construction:

• Contractors often have to wait for weeks or even 1-2 months to hear back from the client, and
• Long-term planning turns into a nightmare, because of lots of uncertainty.

Construction bid type #5: Framework tendering

With framework tendering, the project owner compares several bids against quality and prices. 

As a second step, they pick 2 or more contractors to execute the construction project. In other words, each bidder — i.e., contractor — gets their rightful place in the project scheme. For instance, one contractor may work on internal design, in contrast, the second contractor could be charged with handling the fences and outside aspects of a project.

In some cases, connoisseurs refer to framework tendering as joint ventures. In any event, this type of construction bid mostly concerns itself with complex and large projects.

Pros of framework tendering in construction:

• A great starting point for future government-funded projects, especially in the EU, and
• Due to their length, contracts can provide long-term revenue for the contractor. 

Cons of framework tendering in construction:

• Bidders often invest a lot of money and efforts to get this type of contract, but sometimes they don’t win the bid, leading to serious financial issues, and
• Unlike other construction bid types, framework tendering lacks the flexibility in terms of customization and negotiation.

—

Now that we got bid types out of the way, let’s explore a few tried-and-tested steps you can take during construction bidding.

What are the steps in construction bidding?

To succeed in construction bidding, contractors must follow a strict series of actions. 

In the following paragraphs, we’ll present 6 steps that general contractors should follow to win more bids, including:

1. Soliciting bids,
2. Subcontracting,
3. Submitting bids,
4. Selecting bids,
5. Forming and signing the contract, and
6. Delivering the project.

Without further ado, let’s get started with the most important steps in construction bidding.

Step #1: Soliciting bids

As a first step, property owners invite general contractors to submit construction bids. Industry specialists often call this the bid solicitation stage. 

At this point of the bidding process and depending on the tender type, the general contractor needs to consider the following documents:

• Request for proposal (RFP): an official client-issued document announcing the project, clarifying the project’s scope, and inviting contractors to submit bids,
• Request for quote or qualifications (RFQ): a formal process where a client asks a group of selected contractors to submit bids for construction projects, and
• Invitation for bid (IFB): an official document that general contractors send to subcontractors with a request to provide pricing for specialized construction services.

These application packages also include information like specifications, drawings, questionnaires, bid date and time — and sometimes even a draft contract. In fact, the client may also share information on whether the project will be public (government-issued) or private (commercial).

Apart from company-related documents for the general contractor, the client often requests subcontractor information as well. After all, the client wants to know who they’ll be dealing with day in and day out.

The bidding process starts as soon as all bid documents are shared with bidders, like RFP, RFQ, and IFB, as we mentioned above.

Step #2: Subcontracting

In the second step of the bidding process, the general contractor asks subcontractors for bids to perform specialized services for the project. For example, these may include plumbing, electrical, and related technical services.

As soon as a subcontractor submits bids to the general contractor, the latter feeds all subcontractor information into the official construction bid which is sent to the client in the following bidding phase.

During this subcontractor bidding process, the general contractor often selects subcontractors they’ve worked with on past projects. Apart from that, the general contractor also skims bid websites (with databases of subcontractors) to get the best subs, as they’re often referred to in industry slang.

With the information on costs collected from the subcontractors, the general contractor estimates a realistic cost using the following construction bidding tools:

• Blueprints or construction plans: a detailed drawing of the project’s particulars, 
• Material quantity takeoffs: a list of physical materials the contractor needs to complete the construction project, and 
• Bill of quantities: an in-depth description of each cost for the project.

According to Kumar Neeraj Jha, the author of the construction book we referenced earlier, subcontractors make up a vital part of the construction puzzle:

“The process of managing the subcontractor right from their selection till the subcontract is closed out is essential for the success of a project, given the fact that in some projects more than half of the project value is subcontracted.” 

Step #3: Submitting bids

The third step in the bidding process involves contractors busting out their calculators and submitting their documentation on project costs, project timeline, and their business information. It’s like a beauty pageant — but for construction companies.

In any case, remember that the bid documents should be easy to follow and include items such as:

• Materials and equipment,
• Labor costs,
• Overhead costs, 
• Subcontractor expenses, and
• Profit margin.

When contractors consider this information, they are more likely to offer a competitive bid to the client. 

But whatever you do in the bidding process, never forget to include precise timelines.

In some projects, the client requests that the general contractor submit a bid bond together with the bid. The bid bond guarantees that the project will be completed as per the submitted bid.

Bonus tip: Collect your insurance documentation, like general liability insurance, workers’ compensation insurance, and builders risk insurance. If the contractor submits this documentation, they can increase the chances of winning the project.

Step #4: Selecting bids

The next step entails selecting a few competitive bids (or just one) that grab the client’s attention. Typically, clients use a scoring system to rank all bids. 

As a rule of thumb, non-government project owners consider the following strong points of a contractor, including:

• Price and detailed cost explanations,
• Scheduling philosophy, such as workflow optimization,
• Experience on similar contracts, 
• Personnel resumes of staff members, 
• Safety records for past projects, and
• Other criteria relevant to the project.

In rare cases, the client may want to interview the general contractor in more depth.

The same principles apply to government-funded projects as well, but with a big difference — government clients give priority to price over all other aspects.

During bid selection, the client implements bid leveling. Bid leveling simply entails a concerted effort by the client to standardize their bid format. In turn, bid leveling enables the client to properly compare the differences and similarities between a wide range of bidders. 

Step #5: Forming and signing the contract

As soon as the client has selected the most suitable bid, they’ll discuss all terms and the final pricing structure with the general contractor. So, yes, contractors often have room for negotiation between bid submission and contract formation.

To make things clearer, the contract needs to contain the following:

• Contract drawings,
• Detailed project specifications, 
• General conditions of contract,
• Special conditions of contract, and
• Agreement (i.e., actual document signed by both parties).

To get the most out of the project, contractors should consult legal experts first. The reason is that a construction contract is only valid if it considers 3 legal aspects, including: 

1. Offer: one entity vows to do one thing in exchange for the other entity doing another thing,
2. Acceptance: all parties agree to all terms from the original offer (i.e., contractor bid), and
3. Consideration: the contract has to be mutually beneficial or, in other words, both entities have to receive benefits and provide value.

So far, so good? Great! 

Let’s get to the sixth and final step in construction bidding.

Bonus step: Delivering the project

Although not officially part of the bidding process, project delivery can reveal how professional and knowledgeable the contractor actually is. If the project is done well, the contractor may expect to be hired by the same client in the future.

Simply put, the general contractor selects the project delivery method before the bidding starts. The chosen project delivery method has a role to play before, during, and after bidding.

In a nutshell, methods of project delivery include:

• Design-Bid-Build: the traditional method wherein the property owner hires a designer separate from contractors. As soon as the project design is ready, the property owner solicits bids from contractors to implement the design.
• Construction Management at Risk (CMAR): different firms are in charge of design and construction.
• Design-Build (D-B): a single contractor takes care of construction and design.
• Integrated Project Delivery (IPD): as one of the newest methods in project delivery, the IPD method means that the property owner, architect, and contractor work as a big team to share the risk among themselves equally.

By carefully selecting the project delivery method, the general contractor can ensure that their project is completed efficiently, on time, and within budget.

How to bid on construction jobs (+ expert tips)? 

Since you’re reading this article, you probably have a few doubts about construction jobs. So, we consulted experts and dove deep into the literature.

In particular, we’ll explore a few sound tips to supercharge your construction bid as a contractor.

Let’s get to it.

Tip #1: Evaluate project requirements

Competitive bidding is all about knowing which projects to bid on and which ones to skip.

In other words, be realistic — don’t bid on projects you know you’ll have difficulty implementing. 

While you’re at it, find out as many details as possible about the items from this construction bid checklist:

• Relevant documentation,
• Existing conditions of the construction site,
• Schedule, 
• Project scope,
• Terms of payment,
• Costs, and
• Contact information.

Kumar Neeraj Jha, the author of Construction Project Management: Theory and Practice we mentioned a couple of times already, differentiates between what he calls the right and wrong contractor:

“The terms ‘right’ and ‘wrong’ contractor are subjective. The term ‘right contractor’ signifies ‘fitness of purpose’ for the proposed project. The term ‘right contractor’ has nothing to do with a large or small contractor, since it may so happen that the large contractor may not be the right contractor for a proposed project if it is of low value.”

So, note that you may be the right fit for the project even though you are a small contractor.

Bonus tip: When subcontractors or contractors are unsure about specific project areas, things can easily go sideways. That’s why we recommend always checking with the clients to avoid any confusion. In fact, unaddressed uncertainties can lead to catastrophic losses in money and time.

Tip #2: Estimate costs 

Proper cost estimation is the bread and butter of successful construction bids. In fact, countless companies still struggle with things like market price changes, inadequate risk management, and deficient resource management — all leading to subpar cost estimates (expected project expenses).

To learn more about cost estimates, we contacted Greg Batista, CEO of G. Batista Engineering and Construction. Greg emphasized the importance of ensuring that bids take into account all relevant factors:

“Precise cost estimation — encompassing materials, labor, and contingencies — ensures competitive and realistic bids.”

But apart from that, general contractors must remember that preparing cost estimates isn’t cheap. Authors of Estimating Building Costs claim that cost estimates can make or break your business operations:

“The cost of preparing estimates is accounted for under general overhead or the cost of doing business. If a contractor is unsuccessful in too many bids, then the cumulative cost of estimating is high and the volume of work on hand will curtail business growth and threaten corporate survival.”

So, be wise with respect to which projects you bid on!

Tip #3: Showcase experience

In almost all cases, the property owner will ask the contractor to present them with compelling evidence of executing similar projects in the last few years. In other words, field experience and good reference material from other clients make all the difference.

Construction expert Greg Batista had a few more nuggets of wisdom to share when he said that presenting yourself as an experienced contractor — with documentation to back it up — always pays dividends:

“Highlighting past successes, certifications, and unique qualifications builds trust with clients. Tailoring each bid to the specific project demonstrates professionalism and dedication, increasing the likelihood of winning contracts.”

Speaking of experience, the best unit of measurement for assessing your successful bids is the bid-hit ratio. This measure lets you in on your won and lost bids. So, what is it?

In a nutshell, a bid-hit ratio documents how many contracts a general contractor has won after bidding. Say your bid-hit ratio is 5:1 — this means that you typically win 1 out of every 5 bids. A decent bid-hit ratio for private projects is 4:1, and a proper bid-hit ratio for public projects adds up to 10:1.

Tip #4: Use software to track time and improve bidding efficiency 

During the process of collecting documents and completing other bidding-related tasks, contractors need to efficiently create reliable bids and manage subcontractors. Also, they need software to see costs at a glance and present them to potential clients transparently.

For that purpose, contractors can use Clockify’s construction timesheet to track:

• Overhead, 
• Labor, 
• Materials, and 
• Other costs.

With a digital construction timesheet, contractors can easily:

• See who works on what and when, and
• Mark work hours as billable or non-billable. 

Likewise, during the first 3 bid stages, contractors have to invest significant time to collect and submit documentation. To tackle unnecessary delays in managing bid documents, you can make use of Clockify for scheduling purposes.

With Clockify, you can easily arrange time and workforce resources by:

• Visualizing and planning projects in a way that tracks bid solicitation and subcontracting,
• Assigning designers, architects, and subcontractors to projects, and
• Adding milestones.

All these functionalities allow you to continue preparing competitive, on-time bids for the best results with clients.

Tip #5: Get to know the competition (and the client)

In the construction industry, competition is often fierce. General practice suggests that clients need to receive at least 3 contractor bids for the bidding process to qualify as fair (except when the clients themselves pick a single contractor or a group of contractors in the bid solicitation phase).

In reality, many bid solicitations attract dozens — and even hundreds — of bids. 

Brian Greenhalgh, the author of the Introduction to Estimating for Construction, writes that it’s all about offering additional value to the client:

“The key objective is to offer better underlying value to a client than the competition, which is done through a combination of: defining client value, establishing supplier relationships, integrating activities, managing costs collaboratively, developing continuous improvement.”

Another solution for outlasting the competition is submitting your bid before everyone else does. Clients are also human. As a result, they’re more likely to review the first 5-10 bids they received in more depth than skimming through hundreds of others.

In a nutshell, you need to better understand how long it takes your competitors to submit their bids. Perhaps you can even learn from them by exploring construction bidding networks and marketplaces.

Tip #6: Take your time with your construction bid

A quote attributed to Benjamin Franklin is that “great haste makes great waste”.

With the constraints we mentioned in the previous section, you also need to learn how to take your time in collecting data for your construction bid. Don’t just fire off your bids in an attempt to bid on as many tenders as possible.

So, it’s about striking the perfect balance between being faster than your competitors and taking sufficient time to prepare a proper bid.

In most cases, clients provide a few weeks for prospective bidders to apply with their construction bid. That’s ample time for evaluating project requirements, estimating costs, and getting to know the competition (and the client).

We reached out to Alaa Abdelhamid — a construction specialist and the CEO of Behind the Hard Hat. Alaa says that a few weeks should be enough time to prepare a decent bid:

“​​Commercial construction and government projects typically take around 2 to 3 weeks [to bid on].”

Why is efficient construction bidding important?

Efficient construction bidding helps contractors maintain profitability and win more bids. It’s no wonder then that general contractors want to submit more competitive bids in shorter periods. In fact, submitting more competitive bids often translates into more contracts won.

The upcoming segment discusses the 3 greatest benefits of efficient construction bidding. For a general overview, efficient construction bidding:

• Saves time and other resources,
• Increases profit, and
• Amplifies your professional network.

Let’s explore each benefit in more detail.

Benefit #1: Efficient bidding raises the bid-hit ratio

The more efficiently a contractor submits high-quality bids, the more contracts they’ll win. In turn, the bid-hit ratio improves in time.

That’s why construction expert Greg Batista says that efficient construction bidding benefits the general contractor long-term:

“Efficient bidding increases the chances of winning contracts, leading to a steady flow of projects and a stronger market position. Additionally, it saves time and resources, allowing contractors to focus on executing successful projects while maximizing their potential for growth and success in the construction industry.”

Benefit #2: Efficient bidding increases customer satisfaction

When bidders apply for multiple projects with top-notch construction bids, they can significantly increase their earnings. 

Yet, at the end of the day, what matters most is how happy the client is with how you handled the construction project.

Construction expert Alaa Abdelhamid we referenced earlier told us that nothing beats merging your industry proficiency and resources for improved profits:

“Efficient bidding — meaning a contractor bids jobs that are aligned with his expertise and resources — leads to a balanced equilibrium between customer satisfaction and the pathway to revenue-enhancing profitability. This methodology culminates in the cultivation of a reputable contractor image, fostering expansion in project acquisition, and ultimately yielding improved margins.”

Bonus tip: To make your bids even more efficient, you can consider bid management as your next upgrade. Simply put, a bid manager is a person solely in charge of reviewing tenders and submitting construction bids to clients. Bid management also helps contractors reduce manual errors and automate repetitive tasks.

Benefit #3: Efficient bidding amplifies your professional network

A huge network of professionals goes a long way in the construction industry. This network can be enhanced by:

• Representatives of potential clients, 
• Architects and designers, 
• Subcontractors, and
• Other construction vendors and professionals.

For example, general contractors may be familiar with hundreds of subcontractors with whom they can bid on big tenders. So, the sooner general contractors build a wide-ranging professional network, the bigger their chances of being efficient in collecting bid documents.

Also, working with the best of the best says something about you as a contractor. Implicitly, it means that others value working with you. All this translates into trust among prospective clients. In other words, the more high-quality projects you get done with the help of your professional network, the greater the possibility of landing new contracts.

This time, Alaa Abdelhamid thinks that efficient construction bidding is the basis from which all contractors can either make or break their business:

“Efficient bidding acts as a foundation for establishing trust, fostering recurring client relationships, and consequently driving the scalable expansion of the business. It enables the contractor to win more jobs, leading to increased exposure and enhanced collaboration with all stakeholders in the industry.”

So, here are a few quick tips on how to build a professional network in the construction industry:

• Improve work performance so you have something to show for,
• Harness the power of social media to showcase your expertise,
• Build relationships with industry stakeholders, and
• Reach out to prospective clients every once in a while.

—

Note: We advise you to consult with a construction bidding professional before submitting your construction bids. Clockify is not responsible for any losses incurred should this construction bidding guide be used without additional expert guidance.

Wrap-up: A proper construction bid is all about cost estimates and learning about the client and competition

An exemplary construction bid relies on a substantial data set, not on mere hunches. 

This article discussed making your next construction bid more competitive and winning more contracts. In short, here are the main takeaways:

• Avoid bidding on every tender you see — some aren’t worth your time and effort,
• Create a pool of dependable subcontractors who can help you with specialized projects,
• Estimate costs in-depth and do it way before you submit your bid,
• Strike a balance between sending your bid before everyone else and overthinking it,
• Consider using time-tracking and construction software to make things run smoothly, and
• Consult experts with industry experience and peers before you send your next bid.

Just don’t forget to wear your tool belt and hard hat during the bidding process. You know, to really sell the image.

Good luck!

Glossary of basic construction bidding terms

• Bid-hit ratio (sometimes called a win rate) — A bid-hit ratio keeps track of how many projects a contractor has won after bidding.
• Bid bond (sometimes called bid security) — A legal guarantee (or agreement) that acts as an assurance that the general contractor will fulfill their obligations on a construction project.
• Construction management at risk (CMAR) — A project delivery method wherein different construction firms are in charge of construction and design.
• Cost estimate — The projected expenses for the project for which the contractor is bidding.
• Design-Bid-Build — A much-used project delivery method wherein the client hires a designer to complete project design before construction can start. Then, the client solicits bids from contractors to implement the design. With this project delivery method, overlaps between construction and design are avoided.
• Design-Build (D-B) — A project delivery method wherein a single contractor takes care of design and construction.
• Guaranteed maximum price (GMP) — The amount the property owner will pay the contractor upon project completion. If the contractor crosses the GMP threshold, the construction manager is taking over all risks, like increased project costs.
• General contractor (GC) — A type of contractor who sends bids to clients and hires subcontractors to complete specialized work.
• Invitation for bid (IFB) — An official document that general contractors share with subcontractors, asking them to provide pricing for specialized construction services.
• Integrated Project Delivery (IPD) — A recently developed project delivery method; it means that the property owner, architect, and contractor work as a large team to share the risk among themselves equally.
• Net profit margin — The number general contractors get when they subtract all expenses from their sales. In other words, it’s how much actual profit they have made.
• Request for proposal (RFP) — An official client-issued document announcing the project, explaining the project’s scope, and asking contractors to submit bids.
• Request for quote (RFQ) — A formal process where a client asks a group of general contractors to submit bids to work on construction projects.
• Subcontractor — A type of contractor that operates under the general contractor; i.e., the subcontractor offers specialized services for which the general contractor pays them, like plumbing.
• Tender and tendering — An invitation of a client to a construction company or general contractor to submit bids for a project.

Sources for the table:

Apfelbaum, A. (2010). Construction Cost Management: Cost Engineering, Cost Controls & Controlled

Greenhalgh, B. (2013). Introduction to Estimating for Construction

Hanák, T., Drozdová, A., & Marović, I. (2021). Bidding Strategy in Construction Public Procurement: A Contractor’s Perspective https://doi.org/10.3390/buildings11020047 

Harvard Law School (2023), How To Avoid a Business Contract Bidding War

National Association of Home Builders (2022); Profit Margins Fall as Balance Sheets Grow https://www.nahb.org/blog/2022/04/eye-post 

Neeraj Jha, K. (2011). Construction Project Management: Theory and Practice

Popescu C.M., Phaobunjong K., Ovararin N., (2003). Estimating Building Costs

Salman, A. (2022). Selection of Construction Bidders Using the Analytical Hierarchy Process and Friedman Theory. Frontiers in Built Environment, 7, 815022 https://doi.org/10.3389/fbuil.2021.815022 

Wibowo, Mochamad & Astana, I Nyoman & H.A., Rusdi. (2015). An Analysis of Bidding Strategy, Project Performance and Company Performance Relationship in Construction. Procedia Engineering http://dx.doi.org/10.1016/j.proeng.2015.11.015 

If yes, one of the suitable career options to explore is cost accounting.

As a vital aspect of financial management that focuses on measuring, analyzing, and controlling costs, cost accounting is an intriguing career pathway for those with a flair for numbers and precision.

In this article, we take a close look at the principles, advantages, and various methodologies associated with cost accounting. 

We also explore the key differences between cost accounting and financial accounting, and the skills you need to become a cost accountant.  

But first, let’s look at what cost accounting means.

What is cost accounting?

Cost accounting involves determining all the costs a company incurs when manufacturing a product (a smartphone, a car, or steel, etc.) or delivering a service (bookkeeping, social media management, etc.).

The primary aim of cost accounting is to help the management understand their costs and make informed decisions on controlling expenses and maximizing profit.

Cost accountants classify costs into different categories, such as:

• Direct costs (the cost involved in manufacturing a product or delivering a service), and
• Indirect costs or overhead costs (such as administration, taxes, and insurance that are not directly related to production).

Now, let’s look at what the practice of cost accounting involves.

According to the Statements of Federal Financial Accounting Standards (SFFAS) that describes the accounting standards and terms, cost accountancy is:

“Any disclosed or established accounting method or technique which is used for measurement of cost, assignment of cost to accounting periods, and assignment of cost to cost objects.“

But, what are cost objects and accounting periods?

Let’s go over these and other key terms used in this field:

• Cost object — any product, item, activity, or department in an organization whose cost you measure. 
• Cost centers — a specific location, department, function, activity, or individual in an organization that contributes to the costs.
• Cost driver — a factor that influences the cost of a product or activity (for example, the number of raw materials you order, the quality of a product, etc.). 
• Cost allocation — involves assigning a company’s total costs to specific cost centers or cost objects.
• Accounting period — also called the financial period or reporting period, the accounting period is the time span for which a company prepares its financial statements.

Now, let’s look at what a cost accountant’s role is.

What is the role of a cost accountant?

The primary role of a cost accountant is to calculate, track, and manage the costs associated with a company’s products or services. Cost accountants play a crucial role in helping the management make informed financial decisions. 

Some key responsibilities of a cost accountant include:

• Cost analysis — understanding the various costs a company incurs in manufacturing a product or delivering a service, including direct and indirect costs. 
• Cost allocation — assigning costs to different cost centers, products, departments, or projects.
• Budgeting and forecasting — helping the management prepare budgets and financial forecasts by providing data on costs and revenue.
• Inventory management — monitoring inventory levels to help the management identify inventory control issues, such as low stock or overstocking.
• Variance analysis — calculating the differences between actual costs and budgeted costs.  
• Pricing decisions — providing support in determining product or service prices by considering the cost structure, market conditions, and competition.
• Process improvement — identifying areas of inefficiency and recommending process improvements.
• Financial reporting — preparing cost-related reports, cost sheets, and financial reports.
• Compliance and regulation — ensuring compliance with accounting standards, industry regulations, and tax laws. 
• Cost control — suggesting ways to control costs and helping implement cost control strategies to maximize profit.
• Strategic decisions — assisting management in evaluating the financial viability of potential projects, investments, or business decisions.

Elements of cost accounting

According to statistician and author of Cost accounting and costing methods, Harold J. Wheldon, the cost of manufacturing a product or delivering a service can be grouped under 4 different categories: materials, labor, direct expenses, and overheads.

These types of costs are also known as the ‘elements of cost accounting.’ 

Let’s see what each of them means:

• Material — the expenses related to purchasing materials used in the production process. It includes the cost of raw materials, components, packaging, and any other materials that form part of the finished goods/services.
• Labor — expenses related to employing workers directly involved in the production or service delivery. Labor includes wages, salaries, benefits, and other direct labor costs.
• Other direct costs — these are directly linked to specific cost units but are not categorized as materials, labor, or overhead costs. Examples include subcontractor fees, equipment rental, transportation costs, and specialized services.
• Overhead (indirect costs) — the indirect expenses that support production or service delivery but cannot be directly linked to production. These costs include rent, utilities, administration, depreciation, maintenance, etc.

When you add up the cost of direct materials, direct labor, and direct expenses that are involved in the production of goods, you get prime cost. When you add the prime cost and overhead/indirect costs, you get works cost or factory cost. In other words, works cost is the sum of all the elements of cost accounting.

Next, by adding the works cost to the cost of administration, selling, and distribution, you get the total cost of sales, which is the cost of manufacturing a product or delivering a service. 

Here is an image that makes it easy to understand these costs:

How cost accounting works

Cost accounting starts with the process of recording costs involved in producing goods or services. These costs include direct costs (e.g., raw materials, direct labor) and indirect costs (e.g., overhead expenses like rent, utilities, and depreciation). 

Let’s look at the steps of cost accounting to understand how it works.

Step #1: Classify costs and calculate direct costs

As described in the book titled Cost Accounting: Principles & Practice, the first step in cost accounting should be classifying labor, materials, and other expenses as direct and indirect costs. 

However, it’s important to note that materials, labor, and other expenses can be both direct and indirect.

Direct costs are the ones you would directly incur when producing goods or services.

Here are some examples of direct costs in each of the categories:

• Direct materials — lumber, steel, fiber, or wood required for production (that become part of the finished goods/services),
• Direct labor — carpenter, machine operator, designer, etc., involved in the production, and
• Other direct expenses — rental of machinery/equipment, transportation of machines.

Indirect costs, while being important for operations, are not directly linked to production activities.

These are the examples of indirect costs in each of the categories:

• Indirect materials — fuel for transport, stationary, consumables, office furniture (that are not part of the finished goods/services),
• Indirect labor — management, office administration, security personnel, etc., and
• Other indirect expenses — utilities, sales, marketing, depreciation, taxes, insurance, etc.

Step #2: Calculate the prime cost

The next step is to calculate the prime cost using this formula:

Prime cost = Direct labor + Direct materials + Direct expenses

Step #3: Calculate the works cost

This is the sum of prime cost and production overheads. The formula goes as follows:

Works cost = Prime cost + Production/factory overheads

Step #4: Calculate the production cost

Next, calculate the cost of sales by adding up works (factory) cost and administration overheads.

Cost of sales = Works cost + administration overheads

Step #5: Calculate the total cost of sales

Now, add up all the above costs to arrive at the total cost of sales:

Total cost of sales = Production cost + marketing/advertising and distribution costs

Examples of cost accounting

These examples will help you better understand how cost accounting works.

Cost accounting example #1

XXX company has recorded these expenses in producing 2,000 units of smartphones in the first quarter of 2023:

• Raw material purchase — $12,000
• Direct wages — $50,000
• Other direct expenses — $10,000
• Factory overhead — $10,000
• Office rent and administration — $30,000
• Distribution — $25,000
• Advertising — $2,500
• Market research — $1,000

The company has earned a sales revenue of $130,000 in the same period.

The cost accountant now prepares a cost sheet to reflect the expenses and the revenue.

By looking at the cost sheet, we see that the cost of production of 2,000 units of smartphones ($140,500) is more than the sales revenue ($130,000), resulting in a loss of $10,500.

Let’s look at another example to understand how cost accounting works.

Cost accounting example #2

A company earned a revenue of $89,000 in June 2023 from the sales of product X. The company has a record of the costs of the raw materials purchased, salaries paid, and other expenses:

• Raw materials — $20,000
• Direct wages — $25,000
• Other direct expenses — $12,000
• Factory overhead — $5,000
• Administration — $11,000
• Marketing — $800
• Distribution — $15,000

Here’s what a cost sheet a cost accountant prepares to calculate the cost of production and the net profit would look like: 

The cost sheet shows that the company’s revenue ($89,000) is higher than the production costs ($88,800) allowing it to earn a profit of $200 in the month of June 2023. 

When the revenue a company earns by selling its product is more than the cost it incurs in making the product, it earns a profit. On the other hand, when the cost of manufacturing a product is more than the revenue, the company suffers a loss.

As you can see from these examples, cost accounting can be done on a monthly basis (example #2), quarterly basis (example #1), or for any other time period to understand the cost of production and plan the budget for upcoming projects.

Cost accounting vs. financial accounting and management accounting: Key differences

Let’s see how cost accounting compares with other branches of accounting — financial accounting and management accounting.

Financial accounting vs cost accounting

Financial accounting deals with assessing the overall financial health of a business.

Financial accountants specialize in: 

• Recording, 
• Summarizing, and 
• Reporting a business’s financial transactions through financial statements.

These financial statements (including income statements, balance sheets, and cash flow statements) offer a detailed view of a company’s financial performance and status over a specific period. 

The primary goal of financial accounting is to allow shareholders, investors, regulators, creditors, and the public to see how a company has performed in a specific time period. In contrast, cost accounting aims to determine and track the actual cost of production.

Financial accounting, unlike cost accounting, follows one of these accounting standards:

• Generally Accepted Accounting Principles (GAAP) that are the accounting standards, principles, and procedures that are practiced in the US, or,
• International Financial Reporting Standards (IFRS), which is a set of global accounting standards developed by the International Accounting Standards Board (IASB). 

While the objectives and processes may differ between cost accounting and financial accounting, both are essential for management accounting, the next topic of our discussion.

Management accounting vs cost accounting

While cost accounting is concerned with tracking and comparing the cost of production, the primary goal of management accounting is to analyze and interpret the financial information (revenue, production costs, profit, loss, etc.) obtained through both financial and cost accounting. 

The management accounting relies on the financial reports from cost accounting and financial accounting to make informed decisions on the company’s economic growth.

This table gives you an overview of the differences between cost accounting, financial accounting, and management accounting.

What are the 4 types of cost accounting?

While businesses use many types of cost accounting methods to manage and analyze their costs efficiently, we are going to focus on 4 main types of cost accounting:

• Standard costing,
• Activity-based accounting,
• Marginal costing, and
• Lean accounting.

The choice of a method usually depends on the industry, the nature of the products or services, and the company’s resources, needs and goals.

Type #1: Standard costing

Standard costing is an approach to accounting that companies use to estimate expenses and revenue based on predetermined cost standards.

The cost standards are set for all aspects of operation or production, including the cost of materials, labor, overheads, and indirect costs.

Here’s an easy way to understand the concept of standard costing given by the authors of Managerial Accounting: Creating Value in a Dynamic Business Environment, Ronald. W. Hilton and David E. Platt.

They compare standard costs to a ‘thermostat.’ Just as you can set ‘standard’ temperatures using a thermostat, you can set standards for the company’s expenses and monitor them with standard costing.

According to Alexander Berger, the author of Standard Costing, Variance Analysis, and Decision-Making, standard costing is most suited for manufacturing companies where production activities tend to be repetitive. However, Hilton and Platt write that many firms in the service industry also use standard costing. 

For instance, American Airlines sets standards for maintenance and fuel costs, while Allstate, an insurance company, sets standards for the time it takes to process an application.

Some commonly used methods to set cost standards include: 

• Historical records of expenses, 
• Engineering studies, and 
• Consultation with cost accountants, suppliers, and other industry experts.

But, estimating the expenses and profit with standard costing is just one part of the story. The other part is about calculating the actual expenses and revenue (often different from the estimated numbers) at the end of the year.

This is where variance analysis comes into the picture. 

What is variance analysis?

Variance analysis is all about finding out how the actual costs vary when compared with the planned or budgeted costs.

Here is the simple formula to calculate variance:

Variance = Actual costs/revenue – Planned costs/revenue

Based on the answer you get after this calculation, the variance can be:

• Favorable — the actual cost is lower than the planned cost (the result of the calculation is a positive number), or
• Unfavorable — the actual cost incurred is higher than the planned cost (the calculation result is a negative number).

Type #2: Activity-based accounting (ABC)

According to accounting expert and author, Peter B.B. Turney, activity-based accounting method (ABC) is based on the premise that “products require activities and each activity consumes a certain number of resources.”

In simple words, this means that some activities (such as, operating a machine) are involved in making a product, and each of these activities involve costs.

In contrast to standard costing, which assigns pre-determined costs to materials and labor, ABC assigns costs to the actual resources used up in each activity.

For example, to manufacture a mobile phone, the company needs to purchase raw materials. In addition to the cost of raw materials, the cost accountant also calculates the time the purchasing manager spends acquiring the raw materials.

Type #3: Marginal costing

To put it simply, marginal costs are the additional costs a company incurs when manufacturing or selling one unit more than the current level of production.

A ‘unit’ in this context can mean any measure of goods, such as a dozen cars or a single smartphone.

For instance, let’s say a company manufactures 500 pairs of shoes per month and their total cost of production is $1,000.

However, the company decided to step up production and make 1,000 pairs of shoes next month and their production cost is now $2,000.

In this case, the marginal cost of production of an extra pair of shoes is:

Change in production cost between the old level of production to the new level (2,000-1,000) ÷ change in the number of units produced (1,000-500) = 1000÷500 = $2

The marginal cost of manufacturing an extra pair of shoes is $2.

Companies use marginal costing to see how to step up production to maximize profit. 

For instance, if the cost of manufacturing an additional unit is less than the revenue they earn by selling the unit, the company can make a profit.

Conversely, if the cost of manufacturing an additional unit is more than the revenue they can earn by selling it, they will suffer a loss. In this case, the company has to reduce production to remain profitable.

Type #4: Lean accounting

As another method of cost accounting, lean accounting is particularly suited for ‘lean organizations’ or companies that follow the ‘lean management’ practices.

The focus of lean management is to eliminate waste, make small, ongoing improvements in processes, and boost efficiency.

Instead of being a single ‘method’ of cost accounting, lean accounting involves a set of practices and principles designed to boost lean management.

One of the practices used in lean accounting is value stream costing, which visualizes and analyzes the entire value stream (all the processes and activities involved in production).

A technique used to visualize the processes is value stream mapping (VSM). This is a visual representation of all the components and processes required to manufacture a product or deliver a service.  

Once you create a visual stream map, you can identify all the activities and resources required for each value stream. The next step is to prepare an income statement (the detailed cost breakdown for each value stream).

Finally, you can identify and eliminate waste and boost efficiency.

While these are some of the commonly used methods of cost accounting, there are also other forms of cost accounting, such as process accounting and project accounting.

What are the advantages of cost accounting?

By providing vital data on actual costs, cost accounting supports financial planning, cost control, pricing decisions, and much more.

Advantage #1: Cost accounting helps companies find the exact cost of product or service 

To understand the importance of cost accounting, we contacted Michelle Delker, an experienced CPA and founder of The William Stanley CFO Group, a financial services firm. She explains that cost accounting has multiple benefits, such as helping companies find the exact cost of product or service:

“One of the main advantages of cost accounting is the ability to calculate the exact cost of a product or service, empowering companies to determine profitable selling prices. It also aids in understanding cost behavior, assisting businesses in making logical budgeting decisions, and identifying wasteful processes.”

Thus, cost accounting provides vital information about the cost of production — including a breakup of materials, plant capacity, labor, and costs.  

This allows companies to: 

• Calculate and forecast their expenses accurately, 
• Allocate resources efficiently, and 
• Set realistic financial goals. 

By understanding the costs involved in different aspects of the business, managers can make informed decisions about resource allocation and budgeting.

Advantage #2: Cost accounting helps with identifying wasteful activities

One of the primary purposes of cost accounting is to identify profitable and unprofitable activities. 

A case in point is the 2022 study titled Advantages of the Cost Accounting View for Entrepreneurs in Improving Productivity and Financial Stability.

In this study, 90.20% of the surveyed managers agreed that cost accounting helps them identify unprofitable activities. This, in turn, leads to improved financial risk management.

By analyzing costs and performance data, cost accountants can pinpoint areas where wastage, inefficiencies, or losses occur, such as idle time/idle capacity, sub-optimal utilization of resources, and wastage of materials.

Advantage #3: Cost accounting helps determine product pricing

According to a survey titled Cost Accounting System and Its Impact on Service Pricing in Vodafone, 77% of the participants agreed that cost accounting plays a key role in determining service pricing.

How does cost accounting help set product/service pricing?

As you know by now, cost accounting involves calculating the total cost of manufacturing a product or service by calculating the cost of direct materials, labor, and overheads. 

Once you know the total cost, you can add a profit (or markup) to set the price of your product or service. For example, let’s say a company uses cost accounting to calculate the total cost of manufacturing one smartphone as $500. The company can now add a markup of $200 to set the price of the smartphone as $700. 

The right pricing strategy is particularly important in competitive markets, where pricing decisions can impact a company’s profitability. 

For instance, if you price your product too low, there is a risk of consumers perceiving the product to be inferior to your competitors’ products. If you price it too high, your consumers may opt to buy from your competitors who offer a lower selling price. In both cases, your company’s sales and profit can take a hit.

By calculating the actual cost of manufacturing a product or delivering a service (that involves materials, labor, overheads, and other direct expenses), cost accounting helps companies find the right selling price to ensure profit.

Advantage #4: Cost accounting helps with tracking inventory on an ongoing basis

The process of cost accounting involves continuously updating inventory levels. This helps management get real-time information about the quantity and value of the stock on hand. 

Thanks to these insights, companies can: 

• Better manage inventory, 
• Prevent stock outs or overstocking, and 
• Make timely purchasing decisions.  

The findings of the above-cited study on advantages of cost accounting confirms this benefit of cost accounting.

In this study, 85% of the surveyed financial managers said cost accounting helps reduce the cost of inventory by enabling stock control.

Advantage #5: Cost accounting tracks cost behavior enabling cost comparison

By tracking costs on an ongoing basis, cost accountants can compare:

• The cost of each product a company manufactures,
• The cost incurred in different time periods, and
• The costs incurred by each department in a company. 

How does it help you make these comparisons?

Let’s say a company makes two products: X and Y. Using cost accounting, the company calculates the total cost of manufacturing X as well as Y. By comparing the costs, the company can understand which product is more profitable and which one needs pricing adjustments or cost control.

Similarly, if an organization has several departments (production, engineering, sales, design, etc.), cost accounting helps calculate the overheads incurred by each department. Management can then identify the departments that have higher overhead costs and look at ways to reduce these costs.

Finally, by recording cost data for each year (or month), cost accountants can compare what the cost of production has been for the selected period. 

These comparisons offer valuable insights into cost trends, cost efficiencies, and the organization’s overall financial performance. Cost accounting methods, such as marginal costing, also helps understand cost behavior which refers to how costs change in response to changes in production volumes.

Managers can then use this information to benchmark against competitors and make data-driven decisions about resource allocation and process optimization.

Advantage #6: Cost accounting helps with identifying areas with higher profit potential

Unlike financial accounting, which is typically carried out annually, cost accounting is carried out on an as-needed basis to help the management understand and compare the cost of production.

Frequent analysis offers insights into the profitability of different products, services, or projects. As a result, companies can rely on cost accounting to understand which products or services are more profitable and which ones need tweaking in terms of pricing or production efficiency.

Advantage #7: Cost accounting assists in informed budget and investment decisions

Whether it is determining the optimal output levels, deciding whether to make or buy certain components, replacing old equipment, or introducing new products — cost accounting helps the management evaluate the financial impact of each decision. 

This reduces the risk of making hasty decisions and allows management to align their choices with the organization’s long-term goals.

Advantage #8: Cost accounting supports performance evaluation

Cost accounting involves comparing actual costs against standard costs. Management can set performance targets based on the results of this comparison to motivate their staff. Apart from providing a clear direction on what the staff should work towards, the standards used in cost accounting also help design incentives based on performance evaluation.

What are the disadvantages of cost accounting?

Cost accountancy has been developed through a process of trial and error, which means instead of being an exact science, it is an acquired skill based on practice. 

Here are the disadvantages of cost accounting to keep in mind.

Disadvantage #1: Cost accounting is not a standardized system of accounting

Unlike financial accounting, cost accounting is not compliant with GAAP or IFRS and does not use a standard format or procedure to prepare the cost information.

As each company uses its own format for cost accounting, it can be difficult to compare cost data of different companies or different departments. Besides, as there is no uniform method followed, there is a possibility of two different cost accountants obtaining different results with the same information. 

In addition, there is no uniform way of determining the standard costs that cost accounting methods, such as standard costing, rely on. When cost standards are inaccurate, the final cost data and analysis can also be inaccurate.

Disadvantage #2: Cost accounting does not give a holistic picture of costs

Financial experts, such as Michelle Delkercost, warn that cost accounting may not give a complete view of the company’s financial situation in addition to being a resource-heavy accounting method:

“One of the disadvantages is that cost accounting may not always provide a holistic view of the company’s financial condition as it primarily focuses on individual costs rather than the entity’s overall financial performance. Additionally, it can be time-consuming and require significant resources, like experienced accountants and advanced accounting systems.”

Some methods of cost accounting, such as standard accounting and marginal costing, assume variable costs (costs that change when the production volume changes, such as raw materials or labor) to be constant. 

In addition, these methods of cost accounting also ignore fixed costs (costs that remain constant regardless of changes in production volume, such as monthly office rent or insurance premiums).

As no cost is exact or constant at any given time, these assumptions can lead to suboptimal decisions on budget planning, pricing, etc. 

Traditional methods of cost accounting are based on ‘standard’ costs and historical data. As said above, costs do not remain constant and using past/historical data to calculate the current cost of production can increase the chances of the results of cost accounting being inaccurate.

Disadvantage #3: Cost accounting can be resource-heavy

Yet another limitation of cost accounting is that it can be expensive to implement, particularly for smaller businesses. Companies need to invest in hiring experienced cost accountants and advanced tools to record, track, and report costs. The additional expenditure may reduce the profit the company earns.

FAQs about cost accounting 

Have more questions about cost accounting as a career option? In this section, you can find the answers to those questions.

How can I learn cost accounting easily?

While there is no short-cut to learning cost accounting, you can become a successful cost accountant by following these steps:

• Obtain a bachelor’s degree — if you want to learn more about cost accounting, try pursuing a bachelor’s degree in accounting, finance, or a related field, such as business. Some universities offer specialized programs in cost accounting or management accounting.
• Gain practical experience — seek internships or entry-level positions in accounting or finance departments to gain practical experience and exposure to cost accounting principles.
• Pursue master’s degree (optional) — consider pursuing a master’s degree in accounting or a related field to enhance your knowledge and career prospects.
• Acquire professional certifications — certifications, such as Certified Management Accountant (CMA) offered by the Institute of Management Accountants (IMA) can help you showcase specialized expertise. If you want to work in businesses that are publicly traded, you will need to obtain a Certified Public Accountant (CPA) certification by passing the CPA exam conducted by the American Institute of Certified Public Accountants (AICPA). 
• Attend workshops and take up additional courses — deepen your understanding of cost accounting principles through self-study, workshops, or professional development courses.
• Join professional associations — by joining relevant professional associations in the accounting field, you can network, access resources, and stay updated with industry trends.
• Gain experience — seek opportunities to work in cost accounting roles within organizations where you can apply your knowledge and skills in real-world scenarios.
• Stay updated with the latest developments — subscribe to journals and research materials to stay updated on any changes in accounting regulations and cost accounting practices. You may also need to take continuing education courses to maintain your license.

Are cost accountants in demand?

Yes! There are a number of sources that confirm that cost accountants are in demand and will continue to be sought after over the next decade.

For instance, the Bureau of Labor Statistics (BLS) projects an employment growth rate of 6% for accountants and auditors. Considering that the average growth percentage is 5% for all occupations, you can see that accountants have no reason to worry about finding open positions.

Between 2021 and 2031, 81,800 new positions are set to be available in this field, according to BLS data.

That’s not all. According to the list of the Best Business Jobs for 2023 accounting gets a ranking of #14, making it one of the best business jobs.

Yet another proof comes from Robert Half’s survey. This survey shows that cost accountants are the most sought-after experts among all finance and accounting professionals.

What skills are needed for cost accounting?

Cost accountants need to be able to manage and analyze financial data.

But, given the fast-paced changes in the business world, what are the other skills cost accountants need to be future-ready? 

Here are some essential skills needed for cost accounting:

• Math and analytical skills: Cost accountants must also have strong analytical abilities to understand complex financial data, follow cost trends, and make informed decisions.
• Attention to detail: As even small errors can have significant implications, attention to detail is vital to ensure accuracy in cost calculations and reporting.
• Digital skills and data analysis: According to AICPA and CIMA (The Chartered Institute of Management Accountants), cost accountants can gain a competitive advantage by keeping pace with new technological trends, such as data analytics and cybersecurity.
• Communication: Cost accountants should be able to effectively communicate complex financial information to managers, investors, and other decision-makers.
• Ethical conduct: Ethical behavior is critical for cost accountants to maintain the integrity of financial information and ensure compliance with accounting standards and regulations.
• Familiarity with blockchain/cryptocurrency: Accountants need to know how to account for and report digital assets in financial statements. A survey conducted by Blockdata shows that 81 out of the world’s top 100 public companies actively carry out transactions involving blockchain. 
• Accounting tools: Proficiency in accounting software is important for error-free and efficient cost data management. 

The right tools can help cost accountants get a unified view of costs and revenue data across all operations and departments.  

Why is time management important for cost accounting? 

Cost accountants often work on multiple projects, clients, or tasks. As a result, these professionals need to cultivate time management skills to be able to:

• Prioritize projects, clients, and/or tasks,
• Track costs of materials, labor, and other direct and indirect expenses, 
• Ensure accurate client billing, and
• Meet the monthly or yearly deadlines for reporting.

This is where time tracking and billing software, such as Clockify, can help. With this free tool, you can prioritize tasks by adding multiple projects and tasks, set time estimates, and filter them to know which ones to prioritize.

You can also create and track costs related to different cost components like materials, labor, and other direct and indirect costs.

Clockify also allows you to set hourly rates for employees, projects, or tasks and calculate billable hours accurately.

In addition, cost accountants can share reports with clients and give them access to data in real-time using Clockify.

Final thoughts: Mastering cost accounting is easy with the right knowledge and tools

Cost accounting, as you have probably already realized by now, is an indispensable part of any company’s financial management.

In this guide, we have explored the basic concepts of cost accounting with real-life examples. We have also looked at the difference between financial accounting and cost accounting while touching upon the skills you need to become a cost accountant.

Beyond technical competencies, aspiring cost accountants should know how to use the right accounting software and sharpen their skills related to communication, data analysis, and time management.

Armed with the right skills and knowledge, you can make a meaningful impact within the organization and the broader financial landscape.

Sources for the table:

• Cost Accounting: Principles & Practice
• Cost Accounting: A Decision-oriented Approach

However, if your business and team are growing, this guide will help you learn more about how to get the most out of Clockify.

Clockify’s extra features: Overview

TRACKING

Targets & Reminders

Clockify lets you set different time-tracking targets for different teams or members.

Example: Your part-time employees might need to track only 4 hours a day, while full-time employees need to track 8 hours a day, and 40 hours a week.

You can send out reminders to team members who haven’t logged enough hours, or who have logged too many hours on a certain day, week, or month.

For each reminder, you choose who will be notified – only those team members, their team managers, or all admins.

Breaks

In the same way you track the time you spend on work, you can also track the time you spend on breaks.

If you’re using a tracker, you just need to switch from tracker mode to break mode and start the clock.

The same goes for when you’re tracking time through a kiosk. Just click a break button, and the timer will start ticking.

And, in the timesheet, you choose the default break project you’ve previously set for tracking breaks and enter the time you spent on a break.

Custom fields & Required fields 

If you want to keep track of additional information for time entries or in user profiles, you can create custom time fields and custom user fields.

Custom fields can be in the form of a text, number, link, switch button, or a single or multiple selection list.

Custom time entry fields will be visible in the tracker part, and custom user fields will be visible in the user profile.

You can also choose for which projects a custom time entry field will be visible, and determine its default value.

Clockify will prevent users from saving incomplete entries if some of the fields are marked as required (works both for default and custom fields).

Import time

If you’ve been using another way of noting your team’s work hours, and you want to continue where you left off, Clockify gives you the option to import your timesheets (in CSV format).

Kiosk customization & PIN

A kiosk is a way to track time in Clockify. It can be used on any device with an internet connection.

Kiosk customization lets you add your company’s logo and choose how long the kiosk is open when launched.

This is useful when different teams have different shift schedules, so you can set multiple kiosk stations across different locations and customize the length of active sessions.

Personal PIN codes let your team members log in to track their time on a kiosk with their PIN code, which increases overall security and accuracy of time tracking.

QuickBooks integration

Clockify integrates with QuickBooks, so you can send recorded time from Clockify for billing and accounting in QuickBooks.

By connecting Clockify with QuickBooks, you will be able to sync users and customers, and automatically add any missing information (users, or customers/projects).

REPORTING

Estimates & Alerts

Clockify gives you a way to stay on top of project deadlines and budgets by setting up their time and budget estimates.

Time estimates can be set in total for the whole project completion, or you can set it for each task on a project if you want to track the progress in more detail.

Both options can be set to reset every month, so each time a new month starts, dedicated hours to that project or a task will renew.

If your time estimate is set for the whole project, you can choose whether that time will include non-billable hours.

This way you ensure that non-billable activities (e.g. meetings) don’t take away from the overall time you have at your disposal to complete the project.

The budget estimate works the same. It can be set for the whole project in total, or as task-based.

It can reset every month – which is great for retainer contracts.

The budget can also include billable expenses if a portion of it is allocated for occasional expenses.

Then, by tracking your billable activities and billable expenses, you will be able to see the current status and remaining budget.

Labor cost & profit

Clockify gives you a way of tracking your total generated revenues and labor costs, so you have an accurate representation of your business’s profitability – at any given time period.

To set the ground for profit analysis, you first need to set up billable rates (for revenues) and cost rates (for costs).

Your profitability can be tracked for the whole organization, per team member, team, project, task, client, or team member on a project.

Depending on how detailed you want your profit analysis to be, you can set more or less specific billable rates and cost rates.

As your team tracks time on their work, Clockify will pick up the rates information and you will be able to see revenues, costs, and profits in Reports, and export them for further analysis.

Team reports

There are two types of Team reports in Clockify: Attendance and Assignment reports.

The Attendance report shows you the daily start and end time for each member, allows you to compare the team’s work capacity with the actual hours worked, and see their daily time off.

The Assignments report shows you the difference between the scheduled and tracked hours, with a progress bar demonstrating the difference visually.

Both reports give you the option to filter out displayed information in multiple ways, and export reports in a customized view.

Example: Attendance report can show you overtime hours for certain team members only, that are larger than 1h and smaller than 3h, or overtime hours that are exactly 2h long.

Example: Assignments report can show you the progress for multiple projects of one client. Or the comparison between the progress pace of different teams allocated to similar projects.

Expense report

All your expenses will be visible on the Expense report, where you can filter them by team, client, project, category, status, note, or date. This report can also be exported.

GPS tracking

GPS tracking lets you see where your on-field employees currently are (e.g. which client site), and when was the last time they were active.

This is possible only if your team is using the Clockify app on their mobile (iOS, Android).

You can also use the GPS tracking feature to replay the team’s daily routes and check if their transportation routes or allocation on sites could be optimized.

Audit log & Time audit

With a time audit, you can find all entries that are too short/long or are missing information such as a project or a task.

The Audit log shows you all the changes made to a time entry by a certain user on a particular date.

This is useful when you have to provide a justification for afterward changes to an already recorded and approved timesheet.

For example, government agencies like DCAA require you to keep precise records with audit trails for all changes.

You can run audits for a particular date or time period, for a specific user, or for an action that was made (e.g. creation, edits, deletion).

Audit logs older than 1 year are automatically deleted, so you can regularly export your audit log reports as CSV files.

Scheduled reports

Scheduled reports give you a way to receive custom reports every day, week, or month, without repeating the process of filtering and exporting data regularly.

The report will be received via email, and you can choose who will receive it and how often.

Project templates

If your team often works on similar projects, you can organize work much easier with project templates.

When you create your typical project for the first time, save it as a template, so next time you’re adding a new project, you can choose this template as a basis.

The newly created project will inherit its task structure and settings, but you will be able to edit it further.

Forecasting

Clockify forecasting gives you a way to track and foresee your progress on a project.

It takes into consideration the estimates, schedules, and tracked time to warn you if and by how much you will exceed the deadline or remain within it.

Based on that, you can then adjust the estimates, or re-schedule your team.

Customize reports & Time rounding

Besides filtering, Clockify gives you the option to customize reports even further every time you export them.

You can choose which columns to display in reports, no matter if it’s in CSV, Excel, or PDF format.

For example, if you’re sharing the report with a client, you might want to exclude the information on employee IDs or any notes a time entry has.

You can also round time entries up, down, or to the nearest value so reports provide a quick and easy overview.

Screenshots

The screenshotting option is available only on Clockify desktop apps (Windows, Mac, Linux).

Screenshots are taken only while the timer is running and can’t be taken without the user’s knowledge (if active, all users receive a notification).

Screenshots are taken every 5 minutes and are by default blurred for privacy and security reasons, but they can also be taken in higher resolution.

Decimal format

Activating decimal format will enable you to see, enter, and export time in decimal format.

When you export your data it will be displayed as such, so you get the prepared numbers for further calculations or analysis.

MANAGEMENT

Time off

Your team’s time off is managed through Holidays and Policies. The difference is that Holidays don’t require the approval process, unlike Policies which usually do.

Both Holidays and Policies will have a dedicated color to distinguish them easily, and a list of people they apply to.

Holidays can be set to repeat annually on selected dates. And Policies can be customized even further, by choosing if they will:

• be expressed in days or hours, 
• require approval, 
• have a negative balance so users can request time off even if they don’t have accrued days, 
• automatically accrue each year, and
• be possible to request half a day off.

Time off requests can be filtered by status (pending, approved, rejected), team member, and date or time period, and then exported for your internal log.

The Timeline tab gives you an overview of who is absent, for how long, and based on which time off policy or holiday.

The Balance tab shows how many days team members have used and how many time off days they have left.

You can also manually add or remove time off days from their balance, see their history of time off changes, and export data for your internal logs.

Approval

No matter what type of business you’re in, you’re bound to need some kind of approval, whether it’s for work hours, team time off, or expenses.

Example: If the law requires that recorded work hours should be reviewed by at least two people (e.g. employee and manager), timesheet approval will make sure this is respected.

However your team tracks their time, their work hours will be visible in the Timesheet section.

From there, they can review it and submit the timesheet for manager approval.

Submitted timesheets and expenses will have a “pending approval” label, so you know they’ve already been submitted.

You can review pending requests and reject or approve them one by one, or glance over the main information and approve all timesheets with one click.

Example: Say you work 40 hours a week and someone submits a timesheet with 37 hours, and you see that the employee took 3 hours off that week, you can instantly know this timesheet can be approved.

Pending requests can show more details and be edited if you just click on them.

You can also remind Team Managers to approve their team’s timesheets and remind all members who haven’t, to submit their timesheets.

All approved or rejected timesheets and expenses will be visible in the Archive tab, where you can filter them by date, team, and status.

Scheduling

In Clockify you can make schedules in two ways:

• by allocating people to projects (Project View)
• by allocating projects to people (Team View)

However you make your schedules, you will see the same information in both views.

In the Project View, you start by adding projects to the list and then allocating people to them.

This view is perfect if your starting point is a time estimate or a project deadline, so you know how much time to allocate daily, weekly, or monthly.

Here you can also add milestones to a project timeline and mark any important dates or events.

When creating an assignment, you can set its start time, mark it as billable, repeat the assignment for “x” number of weeks, and add a personal note for more detailed instructions.

Once published, team members will be able to see their assignments in Calendar and start tracking time on them.

Team view lets you make schedules based on the team’s working capacity. Creating an assignment functions the same as in Project View.

If you schedule someone over their capacity, Clockify will warn you so you can edit the schedule or edit their capacity directly there.

You can still schedule people over their capacity to keep track of overtime hours, and once they track time on the assignment, their overtime hours will appear in the Attendance Report.

Expenses

Whether you’re tracking expenses to bill them to clients, or for your internal recordings, they provide a significant insight into how well you manage your budgets.

Expense categories in Clockify are a way to segment your expenses, and they can represent any frequent expense type that occurs on your day-to-day.

Expenses can be recorded in sum (e.g. Lunch expense), or based on their unit price (e.g. Travel expense with a unit “gas price per mile”).

If an expense is billable, it will be included in the budget of a project that’s tied to it.

You can also submit expenses for approval if they need to be reviewed or corrected.

Invoicing

Clockify gives you a way of billing your services and expenses to clients right from the app.

Invoices are created by choosing which clients to bill, and which projects to import the billable hours and expenses from.

You can also change currencies for each invoice, control which fields will be displayed, and change the legal entity you bill from (if you have multiple).

Each invoice can include taxes or discounts you may have for that client or invoice specifically.

You can customize email templates when sharing an invoice, both when sending it out for the first time and when reminding people.

Once created, you will be able to track invoice status from unsent, sent, paid, partially paid, or overdue.

Partially paid invoices will have a date on which the payment was made and its amount, so you know how much remains to be paid.

Edit profiles & Bulk edit

Bulk editing allows you to edit multiple entries, projects, and users at once.

Example: You can bulk edit daily working capacity for multiple people at the same time. Or add a new task to multiple projects at once.

Lock time & Add for others

To ensure your time logs and recorded expenses stay accurate, you can use timesheet locking after a certain time period or a specific date.

This will prevent regular users from changing previous entries.

You can lock entries before a specific day in the year, automatically set weekly or monthly locking days, or lock all entries older than “x” number of days, weeks, or months. 

However, as an admin, you can see your team’s timesheets and add time on their behalf, even after the time has been locked.

You can do that in the member’s Timesheet or Calendar, or in the Detailed Report for multiple people at once.

Manager roles

Your processes will be better optimized if you make sure everyone has the right permissions to manage work based on their level of responsibility.

In Clockify there are multiple role levels: Owner, Admin, Project Managers, Team Managers, and Regular Users.

Each role has a different set of permissions, but Manager roles are crucial for optimal project, task, and team management. 

Delegating manager roles helps you speed up the approval process (timesheet, expenses, or time off approval), and better your project management (optimal scheduling decisions, budget control, etc.).

Hide time & pages

You can set different access permissions for different users, so some users won’t be able to see other people’s entries or see projects, teams, or reports.

Example: Not all users need access to Reports, as it’s mostly used by Admins and Managers.

Single sign-on

Single sign-on (SSO) is an authentication system that enables users to log in to multiple tools with a single ID and password.

Clockify can connect to your single sign-on system, so your team can still use one way to log in to it. You would just need to add a custom subdomain for your organization.

Clockify supports SAML2 and OAuth2 protocols used by all major identity providers (OneLogin, Okta, Bitium, Azure, Rippling, JumpCloud, Google, Azure, Okta, Facebook, Github, etc.).

Two-factor Authentication

If you’re paying additional attention to security, Clockify gives you an option to enable 2FA for users to type in a code sent to their email address, prior to log-in.

Data regions

Instead of just globally, your data can be stored in different geographic regions, which is often needed for legal compliance with national laws and regulations.

While you’re creating a new account, you can choose from the following regional locations for you to store data in the USA, Australia, Germany, or the UK.

How to test out all the extra features?

If you aren’t sure Clockify’s extra features will be right for your team, you can activate a free trial for 7 days and test out features yourself. No credit card is required.

Be sure to explore all Clockify features in-depth and check out our other guides for more information.

A time and materials contract is a type of agreement in which the employer agrees to pay the contractor based on the time spent on the project and the materials used in that same project. 

So, in this article, you’ll learn more about:

• What a time and materials contract is,
• What a T&M contract should include,
• When you should opt for a time and materials contract, and
• Key advantages and disadvantages of a T&M contract.

What is a time and materials contract (T&M)?

The official definition of the term is provided by the US Government Accountability Office. According to that definition, T&M contracts are contracts for which “payments to contractors are made based on the number of labor hours billed at hourly rates and, if applicable, other direct costs”.

Just like most other contracts, T&M agreements are typically signed between two parties: contractors and clients. 

To make sure you fully understand the meaning of a T&M contract, we contacted an expert in the field, Greg Batista to get more insight into the topic. 

Greg is the CEO and Founder of G. Batista Engineering & Construction. He defines a T&M contract and warns about the dangers of improperly managing the costs: 

“The client reimburses the contractor for the time spent by their workers and for the materials used in the project, often with invoices providing detailed accounting. This type of contract is often used when the scope of the work is unclear or subject to change, providing flexibility for both parties. However, it may pose a risk to the client if costs aren’t well managed, as it can result in a higher final bill compared to a fixed-price contract.”

T&M contracts are mostly used in construction. However, that doesn’t mean other industries can’t benefit from this kind of agreement. Due to its flexibility, a T&M contract can be used in industries such as:

• Consulting,
• Software development,
• Marketing,
• Graphic design, and
• Research projects.

What is the difference between fixed-price contracts and T&M contracts?

Fixed-price is the most common type of construction contract. But, in some cases, opting for a T&M contract is a much better option. 

We’ll go over the main differences between these two types of contracts to help you determine which type suits your project and your needs better. 

As their name states, fixed-price contracts contain the final price of the construction services and the project that is not subject to any changes. The project’s price, deadline, timeline, and scope are set, unlike T&M contracts. 

With fixed-price contracts, contractors are aware of their exact profit prior to the project’s start, while clients know how much their project will last as well as its exact cost. 

According to the US General Services Administration, a fixed-price contract “provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract.”

An attorney from Schmidt and Clark LLP, Mike Schmidt, highlights a closer alignment between the client and contractor as a crucial difference between a fixed-price and a T&M contract: 

“Unlike fixed-price contracts, where a set amount is agreed upon irrespective of changes in scope or expenses, T&M contracts offer a more flexible approach. They provide a transparent means of accounting for the actual hours worked and the materials used, ensuring a closer alignment between the client’s needs and the provider’s efforts.”

This table shows the main differences between fixed price and T&M contracts:

What are the components of a time and materials contract?

Instead of one price for the whole project, a T&M contract means that parties need to reach an agreement on crucial elements of the project, while most other aspects remain flexible.

There are 10 essential components every T&M contract has to include:

1. Scope of work,
2. Labor rates, 
3. The materials markup,
4. Overhead expenses,
5. Payment milestones,
6. Maximum labor hours,
7. A not-to-exceed cause,
8. The change order process,
9. Breach of contract clause, and
10. Disclaimers. 

Component #1: Scope of work

While time and materials contracts allow for flexibility regarding the scope of work, certain aspects need to be defined prior to the start of the project. 

Schmidt explains how important it is to get into specifics when defining the scope of work: 

“It is crucial to clearly define the scope of work, outlining the specific tasks, responsibilities, and objectives. This helps prevent misunderstandings and disputes down the line.”

The most important aspects to include within the scope of work are:

• Key project outcomes,
• Project phases,
• Estimated timeline and milestones,
• Deliverables (including the key results and reports showcasing labor and materials needed for the deliverables), and 
• The process of reporting and documenting deliverables.

Once both parties agree on the scope of work, a T&M contractor can estimate the costs and the duration of the project. Furthermore, parties need to agree on the key deliverables and the process of documenting them to ensure the project stays within the agreed-upon scope. 

Component #2: Labor rates

Schmidt notes that labor rates include the rates of all of the personnel involved:

“The contract should establish a detailed breakdown of labor rates, including hourly rates for different categories of personnel involved in the project.”

So, a good T&M contract must include the hourly rates of every worker, including everyone involved in administration and project management. Lastly, the contractor (as the project leader) also has to include their own hourly rate. 

Some contractors include their markup for profit within their hourly labor rates. Others treat profit as a separate element. So, depending on the contractor, a T&M contract can include the contractor’s hourly rates with the profit already incorporated within the rate or have the profit item as a separate component. 

Component #3: The materials markup

In a time and materials contract, prices for materials are not known until the very end of the project. 

The cost of materials typically includes: 

• Material prices, 
• Transportation, 
• Taxes, and 
• Contractor markup.

Most of these aspects are hard to specify before the project starts. 

The only aspect almost always specified in the contract is the materials markup which comes down to 10% of the material cost and presents the contractor’s rate for acquiring the materials.

Component #4: Overhead expenses

A T&M agreement should also include overhead expenses. Overhead is the cost of running the whole construction operation which includes costs such as:

• Administrative expenses,
• Costs of temporary facilities, and
• Equipment rentals.

While this component may also be subject to change once the project begins, it’s wise to provide at least a rough estimate of the expected overhead costs. 

Component #5: Payment milestones

As the costs of the project remain unknown until the project’s finished, the payment for a T&M contract can go two ways:

• Once the project is over, and
• While the project is ongoing (progressive billing).

If parties opt for progressive billing, they should include payment milestones within the T&M contract. Payment milestones are progress payments made to the contractor as the work progresses. 

For example, a client can make their first payment once the project initiation phase (first phase of the project) is completed, the second one when the second construction phase is over, the third after the third phase is completed (for instance, utilities such as electrical and plumbing installation are installed), and so on. In this case, the payment milestones correspond to the completion of specific project stages. 

Component #6: Maximum labor hours

In a time and materials contract, maximum labor hours present the limit regarding the number of hours workers can work on the project. This component helps with the unpredictability of the project as it ensures clients don’t pay too much for workers’ hours worked as a result of a prolonged project. 

Moreover, if the project is too unpredictable, parties may add an adjustment to the limit clause. This clause allows for changes in the maximum labor hours once both parties agree the change is necessary for the project’s success. 

Component #7: A not-to-exceed clause

A not-to-exceed clause (NTE) presents the cap on the overall cost of the project. It’s usually determined by estimating the costs of the project while in the initial phase and leaving room for unexpected costs during the project’s implementation. 

The NTE clause serves to protect the client from the project going way over budget. Moreover, this clause also protects contractors. 

With a T&M contract, contractors are fronting the costs and then get reimbursed for the expenses. If both parties agree on the maximum amount a client is willing to pay for the project — the contractor can avoid potential legal disputes which can happen when a client refuses to reimburse the contractor.

Component #8: The change order process

This component is among the most overlooked ones when it comes to time and materials contracts. The change order process consists of a predetermined procedure for dealing with any changes to the original agreement for the project’s scope and budget. 

As T&M contracts leave room for project changes, it’s important to determine the exact process a contractor or a client has to go through when making any changes.

The process depends on the project and, in most cases, the change order process includes:

• A request for changes (from the client or contractor),
• A change proposal (includes the description, reasoning, and costs of the change),
• Proposal negotiation (between the client and the contractor), and
• A written approval of the change from both parties. 

Component #9: Breach of contract clause

A crucial part of any contract is the breach of contract clause.

Its main purpose is to outline what happens in case any party violates the terms of the agreement or fails to fulfill their obligations. 

The breach of contract clause typically includes:

• The definition of the breach of contract,
• The process of giving notice of the breach,
• A cure period for correcting the breach before the agreement is terminated,
• Provisions for damages and penalties in case of a breach, and
• The process of resolving the dispute (in a T&M contract, this usually includes litigation, arbitration, or mediation).

→ Note: This is just an informatory text. For more information on what this clause should include in your case, you should consult a legal expert. 

Component #10: Disclaimers

Disclaimers are additional provisions that protect either the client or the contractor and limit their liability in certain events.

The disclaimers vary depending on the parties and the project. But, in most cases, disclaimers  involve:

• Limited/no warranty for the contractor for the quality of materials chosen by the client,
• No guaranteed project completion date/budget for projects that are too unpredictable,
• Risk of price fluctuations, especially for materials and their transportation, and
• Parties’ responsibility to maintain communication, provide accurate information, and ensure timely access to the site.

How do I bill a T&M contract?

A time and materials contract gives more flexibility when it comes to billing. The client and the contractor have the freedom to agree on the payment schedule that works for them. 

However, regardless of its flexibility, a time and material pricing agreement should always be included in a contract — as that’s the only way to ensure the workers are fully paid for their work. 

No matter what kind of payment schedule contract parties agree on, one element of the time and management contract is always the same — the contractor (or an administrator responsible for tracking) has to track every expense regarding materials and labor involved in the project. This ensures that the client has a clear overview of all of the costs that need to be reimbursed. Tracking expenses and hours of work can be a time-consuming task. Luckily, there are tools that will make the process of tracking T&M rates much easier, and one such is Clockify.

With Clockify’s Construction Timesheet, you can:

• Track hours worked,
• Calculate billable hours based on hourly rates,
• Record expenses,
• Use the clock-in and clock-out system, and
• Export reports to clients. 

Once all hours are tracked, the contractor can create an invoice with all of the billable time and expenses and present it to the client. 

When should you opt for a time and materials contract?

Time and materials contracts offer a lot of flexibility in terms of the duration of a project and overall project costs. 

Opting for a time and materials contract instead of a fixed-price one allows both contractors and clients more freedom in determining the specifics of a project, as there’s no fixed price or deadline to be followed. 

Furthermore, if the size of the project is susceptible to change, a T&M agreement won’t have to be renegotiated as it’s pretty flexible in terms of size and time spent on the construction. 

So, the time and materials contract is a great option when it’s difficult to determine some or all of these elements:

• The size of a project,
• The duration of a project, 
• The exact project costs, and
• The specifics of a project. 

What are examples of time and materials contracts?

Construction in older buildings tends to be unpredictable, as there’s little to no way to determine the state of the building prior to the project’s start. For instance, installations could be outdated and the rot and damage to the walls and floor can be much bigger than it may seem in older buildings. 

Thus, contractors usually opt for a T&M contract to leave more room for changes in both the duration and the costs of the construction. 

For example, if a client needs to renovate a historical building or wishes to preserve the state of an older one, it’s much wiser to opt for a time and materials contract. Older installations are pretty unpredictable, and you never know what kind of challenges a contractor will face during the renovation period. 

Moreover, it’s likely that a historical building will have unique restoration and preservation requirements the contractor didn’t come across before. Thus, the costs and the process would be nearly impossible to predict. So, a fixed-term contract is not the best option.

Another example of a situation where a T&M contract is a great option is the construction of a customized building with lots of interesting and unique features and designs. The intricate features make the costs difficult to estimate and predict. 

What’s more, if a client wants to fully customize their home, they may be more likely to request changes during the process. A time and materials contract allows for more client involvement and changes as the project duration and costs are not determined. 

Tips for creating a time and material contract  

Let’s go over some crucial tips for T&M contracts that will help you avoid common mistakes people make before signing this kind of legal document. 

Tip #1: Clearly define expectations

The flexibility of a T&M contract can lead to misunderstandings if expectations and goals are not clear to both the client and the contractor. 

That is why it’s wise to incorporate the scope of work and objectives that need to be achieved during the project. 

Tip #2: Have detailed records

Keeping detailed records is essential for a time and materials contract. 

Schmidt explains that agreeing on how the records will be kept ensures accuracy: 

“A mechanism for tracking and reporting time and expenses should be established, ensuring accurate documentation for billing purposes.”

Records of hours worked, materials used, and information about everything else that went into the project ensures the client understands the costs of the project, and that the contractor is properly reimbursed.

Tip #3: Set a realistic timeline and budget

A T&M contract leaves room for changes during the project. But, that doesn’t mean you shouldn’t spend time researching the initial budget and timeline estimations. 

This helps avoid legal issues in case a client is unsatisfied with how the project is going, which is something that can happen when the budget and timeline were unrealistic to begin with. 

Tip #4: Communicate regularly

Regular communication between the client and the contractor is crucial, especially when the work is prone to changes. 

It ensures everyone is aware of how the project is going, as well as any potential issues that may arise during the implementation stage.

Tip #5: Send/ask for regular invoices

Aside from regular communication, regular invoice exchange is another way to provide the client with up-to-date information on project expenses.  

Batista recommends weekly or monthly invoices:

“Send invoices regularly (weekly or monthly) to keep your client updated and maintain cash flow; ensure they are sent promptly after the period they cover to facilitate timely payment.”

What’s more, Schmidt agreed on the importance of regular invoicing and noted they should be well-organized and detailed:

“This information should be compiled into well-organized invoices that specify the nature of the work, the hours expended, and the materials utilized. Transparency in billing fosters trust and minimizes potential disputes.”

Tip #6: Wait for approval before any change

If you incorporate the change order process into your contract, you’ll have to go through a detailed process before making any changes to the project.

In case you decide to go without this clause, it’s still important to wait for approval before making any changes. 

For contractors, a client’s approval is necessary as they’re the ones that have to make the final decision for their project. On the other hand, clients should also consult with contractors when requesting changes, as they’re the experts with a much better understanding of the construction process.

Tip #7: Consult a legal expert

Consulting a legal expert before signing a contract is wise regardless of the type of contract you sign. 

But, it’s an essential step with a time and materials contract as it ensures you are protected from the unpredictability a T&M contract may come with. 

What are the advantages of time and materials contracts?

Time and material contracts are a great option for projects that need more flexibility and transparency. Here are its main advantages. 

Advantage #1: Flexibility in terms of project changes and duration

The most important advantage of a time and materials contract is its flexibility. The scope of the project as well as its duration and budget in a T&M contract can be changed at any time.

Therefore, any delays or issues are much easier to manage and deal with. 

Advantage #2: More project control for clients

Clients that want the ability to influence and change the construction process should opt for a T&M contract. Its nature allows the project to be more customizable to the client’s needs throughout the project. 

Still, regardless of the scope of the changes a client wants to make, they should always consult contractors first, as they’re much more familiar with the construction process. 

Advantage #3: Work and budget transparency

Quality assurance is much easier with a time and materials agreement. That’s because this kind of contract allows clients to be involved in every step of the process. They can overview the decision-making process and account for both the expenses and the labor involved in the project. 

Thus, clients looking for more transparency and accountability will be better off with a time and materials contract. 

Advantage #4: Budget flexibility

Progressive billing is typical for a T&M contract since it allows the client to understand the costs at each stage of the project. 

The flexibility in the budget can be an upside for contractors as well. They’ll have a chance to propose new construction ideas or alternative features that may be an even better option during the project’s implementation phase. 

Advantage #5: Easier negotiation prior to the project’s start

Many important elements of the project such as the deadline and costs are undetermined when the T&M contract is signed. 

The negotiation between the client and the contractor is usually much easier as parties don’t have to be too specific regarding the budget, deadline, or even the scope of the project. They can agree on certain aspects of the project and then decide on the next steps while the project is ongoing. 

What are the disadvantages of time and materials contracts?

While a T&M contract comes with many upsides, there are some drawbacks of T&M contracts, especially when it comes to certain types of projects. 

Disadvantage #1: Difficulty in tracking time and materials 

With a time and materials contract, workers are paid based on the time spent on a project and materials used. Therefore, every hour and expense has to be meticulously tracked to ensure everybody is paid fairly. 

This can be a pretty tiring process and often involves additional costs for administration and proper tracking. 

Disadvantage #2: No incentive for worker efficiency

One of the main downsides to T&M contracts is that they often don’t include clear scope of projects as well as a definite timeline. When there’s no deadline or scope limitations, workers have no incentive to finish their work efficiently. Moreover, they may even be incentivized to work longer so they can charge for more hours worked.

Luckily, many time and materials contracts nowadays have not-to-exceed and maximum hours clauses to prevent this from happening. 

Disadvantage #3: Cost uncertainty

Flexibility in the budget can allow for more freedom in decision-making. However, it also brings a lot of uncertainty. 

That’s why there’s always a risk of the project becoming too expensive for the client. 

Disadvantage #4: Profit uncertainty

Without specific clauses regulating this element, time and materials contracts can bring profit uncertainty for contractors. This is a huge risk in case a contract doesn’t contain markup and profit percentages for contractors.

For instance, if labor prices increase during construction, they can consume a large portion of earnings meant for the contractor, reducing the estimated profit. 

Disadvantage #5: Dependency on trust

With a T&M contract, a client has to trust the contractor will report the costs and hours worked truthfully. 

On the other hand, contractors have to trust the client will reimburse them without having to resort to legal action, which can be a costly option. 

Conclusion: Protect yourself from unpredictability to reap the benefits of a time and materials contract

A time and materials contract is great for clients that want more flexibility regarding the budget and the scope of the project. However, it can bring a lot of unpredictability when it comes to costs and the project duration. 

By including key components such as maximum hours and not-to-exceed clauses, both clients and contractors can enjoy the benefits of a flexible contract without the fear of exceeding the budget or facing legal issues.  

In addition, utilizing amazing expense and time tracking tools helps you get a thorough understanding of the labor and costs involved in a project, which ensures everyone is properly informed and reimbursed for their work. 

Why so?

According to a survey titled Owners At The Leading Edge, commissioned by Procore, 75% of construction projects go over the budget or are delivered late (77%) — or both. 

The said survey discovered that there are, on average, 6 changes to the construction budget per project, resulting in a 15% increase in costs.

To prevent budget overruns, it’s important to know how to control both hard costs and soft costs in construction.

But what exactly do these terms mean? 

In this article, we will break down the concepts of hard costs vs soft costs. We will also equip you with 12 actionable tips to estimate these costs so that you can streamline project cost management.

Let’s start.

What are hard costs in construction?

Hard costs or ‘brick-and-mortar costs’ are tangible expenses associated with the physical construction of the project.

Being easily measurable, hard costs involve the direct costs related to materials, labor, equipment, and services needed for the actual construction process.

So, what portion of the total project budget do hard costs represent?

To understand this, we reached out to Brooks Turner, co-owner of CTX Land Clearing and Forestry Mulching who explains that hard costs make up the largest part of the total budget: 

“[T]here is no fixed range or percentage that universally applies to all projects due to their unique nature and complexity levels. However, it is generally recommended that hard costs account for around 70–80% of the total budget.”

Now, if you’re wondering about the examples of hard costs, we’ve got you covered.

Construction hard cost #1: Materials

All the materials that constitute the physical structure of the building come under this category, such as:

• Concrete/cement,
• Steel,
• Lumber,
• Roofing materials,
• Flooring materials,
• Windows and doors,
• Insulation materials,
• Masonry materials (bricks, blocks, etc.),
• Drywall, and others.

Note that this is not an exhaustive list as the specific materials required can vary depending on the project’s scope and design.

Construction hard cost #2: Labor

When calculating labor cost in construction, you will need to factor in these expenses:

• Wages — the costs of paying workers based on their hourly rate or salary,
• Benefits — expenses related to employee benefits, such as health insurance, vacation pay, and other statutory benefits,
• Payroll taxes — employer contributions to Medicare, Social Security, and other payroll taxes,
• Union fees — if the construction workers belong to a trade union, union fees will apply, and
• Overtime pay — extra pay for hours worked beyond the regular working hours.

Again, the specific breakdown of labor costs varies based on location, skill levels of the workforce, project complexity, labor agreements, etc.

Construction hard cost #3: Equipment

Hard costs in construction also include two types of costs related to equipment: 

1. Ownership costs — the initial investment you make in purchasing or renting the equipment. Adding up these costs will give you the total ownership costs that include:

• Purchases or rentals of heavy machines, including excavators, cranes, loaders, bulldozers, concrete mixers, and scaffolding,
• Hand tool purchases,
• Safety equipment rental/purchase,
• The cost of transporting, assembling, and storing the equipment,
• Sales tax and insurance, and
• Depreciation cost that accounts for the wear and tear of equipment during the construction project.

2. Operating costs — the cost of operating, maintaining, and storing the equipment. While ownership costs are fixed costs, the operating costs can vary based on the actual usage. These costs involve:

• Repairs and preventive maintenance,
• Wages for operators, and
• Consumables, including filters, tires, fuel, oil, and other lubricants.

Construction hard cost #4: Subcontractor fees

Hard costs in construction also include all the fees paid to subcontractors.

Subcontractors can charge different types of fees based on the contractual arrangements and scope of work.  

You can hire subcontractors or special trade contractors to perform tasks, such as: 

• Plumbing, heating and air-conditioning,
• Electrical work,
• Plastering, drywall, and insulation,
• Carpentry, 
• Roofing, sheet metal, sliding,
• Concrete,
• Excavation, and others.

Here are some common types of charges to expect from subcontractors:

• Fixed-price contract — a fixed price the subcontractor charges regardless of the cost they incur during the project,
• Time and materials — the charges based on the actual amount of materials used in addition to an hourly labor rate, 
• Cost plus percentage contract — the actual cost incurred, with a fixed percentage or fixed fee added,
• Unit price — the materials required are estimated and the costs of these materials computed,
• Lump sum — a lump sum that includes the cost of materials, labor, and other expenses, and
• Change orders — additional fees for any changes not covered in the original scope of work. 

Construction hard cost #5: Site preparation 

This hard cost category includes the pre-building activities necessary to prepare the construction site before the actual building work begins. 

Here are some of the site preparation activities that count as hard costs:

• Demolition — removal of existing buildings or any other obstructions,
• Grading and leveling — excavation, earthmoving, or foundation work performed to adjust and shape the land,
• Clearing the land —  removal of trees, rocks, vegetation, and other objects on the site,
• Earthwork — soil testing, measures taken to prevent soil erosion, cut and fill operations, and
• Drainage projects — installation of drainage systems, such as underground pipes or culverts.

Moreover, the cost of site preparation will differ by:

• Location,
• Project type,
• Size of the land,
• Accessibility,
• Soil type, and
• Leveling needs.

Construction hard cost #6: Mechanical, electrical, and plumbing systems 

Mechanical, electrical, and plumbing systems (MEP systems) account for a significant portion of the overall construction budget.

These hard costs include:

• Electrical systems — power distribution systems, panels, switches, lighting, wiring, and other electrical components,  
• Plumbing systems — water supply lines, plumbing fixtures, drainage systems, water treatment systems, and
• Mechanical systems — mechanical systems required for elevators, space heating, air conditioning, and ventilation systems.

The cost of plumbing and electrical systems depends on these factors:

• Size of the building/home,
• The type of materials,
• Number of rooms/bathrooms, and
• Number and type of plumbing and electrical fixtures.

Construction hard cost #7: Interior work

Hard costs also include the materials required for interior construction and finishes, such as: 

• Flooring materials, 
• Lighting fixtures,
• Insulation,
• Cabinetry,
• Countertops, and
• Painting materials.

—

Now that you know the different types of hard costs in construction, let’s shift our focus to soft costs.

What are soft costs in construction? 

Simply put, soft costs are intangible expenses that are not associated directly with construction activities.

While hard costs appear during the construction phase, soft costs also include all pre- and post-construction expenses. 

So, what portion of the total project budget do hard costs represent? 

To get an answer to this question, we also contacted Tracy Allen, CPA, CCIFP, and partner at Aldrich CPAs + Advisors. Tracy says that soft costs cover only 20% or 30% of a budget:

“There is no typical range or percentage; it truly depends upon the project itself, the type of work, the type of contract, and the type of contractor. Soft costs can vary as much as 20% up to 35% or more of the budget depending on these factors.

Tracy also adds that when contractors neglect soft costs, they can “work themselves out of business.” 

Here are some examples of soft costs in construction.

Construction soft cost #1: Design costs

You may need to hire several professionals during the design stage, such as:

• Architects,
• Interior designers and decorators,
• Feasibility study experts, and
• Landscape architects/designers.

The fees they charge will come under the soft cost category.

Construction soft cost #2: Marketing and advertising expenses

When calculating soft costs, it is important to set aside a marketing budget, particularly if it is a commercial project (such as retail stores, factories, or other buildings used for commercial purposes).

Your marketing and advertising expenses can relate to:

• Advertising campaigns (digital and print),
• Signage, banners, and other promotional materials,
• Website development,
• Blogging, and  
• Marketing software.

Construction soft cost #3: Utility connection and temporary services

During the construction phase, you may require several temporary services for construction workers, such as:

• Utility connection at the construction site (such as water, electricity, and gas),
• Facilities (such as portable toilets, storage, generators, and offices), and
• Security measures (fencing, surveillance cameras, and security personnel).

Despite occurring during the construction phase, these expenses still fall under the category of soft costs — because they are not directly related to the actual construction.

Construction soft cost #4: Professional consultants and specialists

You may need to hire professional consultants and specialists during the design phase to ensure the building meets the applicable regulatory and environmental standards. 

Soft costs will include the fees you pay to specialists who provide support in the following areas:

• Environmental impact assessments,
• Acoustical engineering,
• Structural engineering,
• Geotechnical investigations,
• Landscape architecture, and
• Construction safety.

Construction soft cost #5: Building permit fees

Expenses associated with construction and building permissions also fall under soft costs. 

In addition to the building permit, you may need to factor in permit fees related to the following:

• Zoning, 
• HVAC (heating, ventilation, and air conditioning),
• Electrical installation, 
• Plumbing installation, 
• Demolition, 
• Fuel storage, 
• Fire safety, 
• Foundation repair, and
• Pool installation.

Depending on the location, you may also need a permit for minor projects, such as solar heating unit installation or window replacement. 

Construction soft cost #6: Training and workforce development

From working at elevated locations to dealing with dangerous chemicals, construction workers face a significant risk of on-the-job injuries. 

As a contractor or builder, it’s important to organize safety training for workers to prevent injuries and promote a safety culture. What’s more, safety training for construction workers is also mandatory in most states.

Soft costs can involve expenses related to training and workforce development programs that are necessary for improving safety and project outcomes.

Here are some examples of training-related soft costs:

• Training sessions for construction personnel, 
• Certifications and licenses required for certain trades or roles, and 
• Professional development opportunities (courses, workshops, seminars, etc.).

Construction soft cost #7: Legal fees

Should you include legal fees as part of your project’s soft costs?

Considering that the average value of global disputes in the construction industry in 2021 was $52.6 million according to the 2022 Global Construction Dispute Report — the answer is yes!

Now, let’s look at the different ways construction attorneys can charge:

• Hourly rate — A rate that can vary depending on the location, experience level of the attorney, or the legal services you need.
• Contingency fee — Here, the attorney will only receive payment (a percentage of the recovery) if they recover compensation. 
• Flat fee — A fixed fee offered for specific services or for handling an entire project. Some lawyers also charge a flat fee for specific tasks, such as preparing a contract draft or conducting discovery. 
• Retainer fee — An arrangement where the attorney charges an upfront monthly fee as a retainer. This fee model is suitable for construction firms that hire multiple contractors and subcontractors or want ongoing legal assistance.
• Hybrid fee arrangements — Different fee arrangements combined. For example, attorneys may charge an initial fixed fee and then charge an hourly rate for ongoing legal services. Or, they may charge an hourly rate of $100 and a 20% contingency fee.

Construction soft cost #8: Insurance

Given that construction projects involve risks — such as property damage, accidents, natural disasters, or liabilities — you may need to buy several types of insurance policies.

While certain insurance policies and surety bonds are mandatory in most US states, government agencies also set the minimum policy limits for contractors.

For instance, The California Department of Transportation specifies a minimum general liability insurance cover of $1,000,000 for bid amounts ≤ $1,000,000.

These are some of the insurance covers you may need:

• Workers’ Compensation,
• Surety bonds (bid bonds, payment bonds, and performance bonds), and 
• Liability insurance (professional liability, builder’s risk insurance, general liability, and business owner’s policy).

What are the differences between soft costs and hard costs?

While hard costs are tangible and directly tied to construction activities, soft costs are intangible and include various indirect expenses throughout the project’s lifecycle.

This table summarizes the key differences between hard costs vs soft costs:

Tips for estimating hard and soft costs in construction

Before determining hard costs and soft costs, it is important to gain a thorough understanding of all aspects of the project.

While experienced contractors can rely on historical data for cost estimation, new contractors can follow these tips to accurately estimate both hard costs and soft costs.

Tip #1: Define the scope of work

Start by reviewing the project requirements and design specifications.

Be sure to review the following:

• Project size and complexity,
• Site conditions,
• Prevailing wages,
• Design,
• Bid documents,
• Industry and market conditions,
• Project timeline and scheduling, and
• Risks. 

This can help you understand the project’s viability, specific requirements (approvals, permits, etc.), and constraints early on.

To find out how industry professionals define the scope of work, we reached out to John Ward, co-owner of Austin Iron Fences, a construction company. He stresses the importance of conducting a feasibility study early on, to understand the scope of work: 

“It is crucial to thoroughly analyze project requirements early on by conducting detailed feasibility studies with input from all relevant stakeholders involved, including architects, engineers, contractors, etc. This ensures comprehensive understanding before embarking upon any estimations, which reduces potential discrepancies later down the line.”

Tip #2: Know the different methods of construction cost estimation

Contractors and cost estimators use different methods of construction cost estimation based on the extent of information they have. In some cases, you may also need to give a rough estimate to understand whether the project is feasible before going ahead with a detailed estimation.

So, to know what type of estimation you need for your project, it is important to know what information is available, or the ‘level’ of cost estimation.

According to The Association for the Advancement of Cost Engineering (AACE), there are 5 levels of cost estimation.

Each of these levels indicates the amount of information (related to design, scope, labor, and material costs) available.

Here are the levels of cost estimation:

1. Order of magnitude — at this level, there are minimal design details available and are used to prepare rough estimates,
2. Study estimates — as more design details become available, you can better understand the project’s feasibility, 
3. Preliminary estimates — data on material costs is available at this stage, 
4. Definitive estimates — more detailed information on design and unit costs are available, and
5. Detailed estimates — complete information on design, labor, and material costs is available.

Based on the amount of information you have (or the level you are at), choose a method of cost estimation — here are some of them:

• Bid estimates — contractors prepare bid estimates by adding up the direct construction costs and a markup, using a combination of these approaches:
  • Subcontractor quotations, 
  • Quantity takeoffs, and
  • Construction procedures.

• Analogous costing — estimators use similar projects as a reference point to estimate the costs of the new project,
• Unit price costing—  contractors arrive at the total price of the project by estimating the price of specific portions or “units of work,”  
• Progress Billing — American Institute of Architects (AIA) progress billing is a construction accounting method used to estimate costs based on the progress made on the project, and
• Parametric estimating — mathematical models developed using historical data are used to estimate project costs.

Tip #3: Research industry benchmarks and guidelines

Before getting started with hard cost and soft cost estimation, it’s important to know the latest guidelines, standards, and cost indices applicable to construction cost estimation.

For that purpose, Tracy Allen advises construction professionals to leverage a wide array of resources:

“The American Institute of Architects (AIA) has some good resources for helping contractors understand the difference between hard and soft costs as well as the overall life cycle of costing a project. In addition, look to your strong construction association for resources such as AGC, CFMA, NUUCA, and others. These associations often have benchmarking surveys and other information available to assist contractors.” 

Let’s look at some of the resources for hard cost and soft cost estimation.

Benchmarks and guides for hard cost estimation

From construction publications to cost databases, there are multiple resources available for hard cost estimation. 

The American Institute of Architects (AIA)

Here are some of the resources available for construction professionals:

• Construction cost estimation guide,
• MasterSpec®, a design and specification software, and
• Industry best practices.

RSMeans Data 

RSMeans is a widely recognized source of updated construction cost data and estimating tools. Here are some of the resources it offers:

• Online database of updated construction costs,
• Cost estimating tools,
• Detailed price breakdowns for labor, material, productivity, and labor, and
• Cost data books.

Craftsman Book Company

Craftsman publishes a variety of cost-estimating books that cover 80 different building types and construction trades.

BNi Building News

BNi Building News offers a range of construction cost databases and books such as:

• General Construction 2024 Cost Book,
• Mechanical/Electrical 2024 Cost Book, and
• Standard Estimating Practice.

National Association of Home Builders (NAHB)

The NAHB offers various resources to assist with construction cost estimation:

• The Cost of Construction Survey report, 
• Market analysis reports, and
• Education and training. 

The National Institute of Building Sciences (NIBS)

The non-profit organization develops the national standards and guidelines to implement BIM (Building information modeling) technology that can help construction professionals in these areas:

• Design and construction,
• Asset management,
• Scheduling, and
• Integrated construction specifications.

Construction Financial Management Association (CFMA)

The CFMA offers plenty of resources and insights on strategic planning, construction accounting, and other topics, such as:

• Construction Financial Benchmarker — a comprehensive analysis of financial performance metrics within the construction sector,
• State Tax Law Guides — compilation of tax laws from all 50 states and Washington, D.C., and
• Financial Management and Accounting for the Construction Industry — construction financial management guide covering accounting, insurance, cash management, and so on. 

Benchmarks for soft cost estimation

Soft costs are relatively challenging to determine as they vary widely based on many factors, such as location and project scope.

We contacted Tom Zauli, Senior Vice President of SOFTRAX, to understand the variance. He explains that soft costs can grow “exponentially” based on the complexity of the project:

“The soft costs for the construction of a single home would most likely have a lower variance than those for the development of an office park, for example. The office park would require more “soft costs” to get it leased and fully functioning, and these soft costs could spiral, depending on the size of the office park.”

And, as there are no benchmarks and guidelines for soft cost estimation, construction professionals need to look at multiple sources to get an idea of what to expect.For instance, NAHB’s 2022 Construction Cost survey reveals the breakup of hard costs and soft costs for a single-family unit measuring 2562 square feet which are 92.6% and 7.4% respectively:

Tip #4: Seek expert advice on cost estimation

Industry experts possess valuable knowledge and experience in cost estimation techniques, factors, and trends specific to the construction industry. 

Their insights can help you accurately estimate both direct costs and indirect costs.

As we are talking about construction cost estimation, one of the first experts to consult would be an accountant.

Our earlier speaker, Tom Zauli, stresses the importance of consulting an accountant in the planning stages in addition to using industry resources:

“My advice is to use these guides in tandem with an accountant experienced in the specific type of construction project you are undertaking. The accountant will have a wealth of real-world / what-if scenarios to consider based on what he/she has seen. Ideally, the combination of a guide and an accountant will help to estimate soft costs accurately.”

The other experts who can guide you in the planning stages include:

• Architects,
• Engineers,
• Real estate professionals,
• Attorneys,
• Experienced contractors and subcontractors, and
• Construction association members.

Wondering if your competitors are willing to guide you? Tracy Allen believes that most professionals in the construction industry are willing to guide newcomers:  

“Most members of the various construction associations are willing to provide guidance and education to new contractors because it helps the entire construction industry. Your competitors won’t give away their ‘secret sauce’ but they will provide guidance.”

Tip #5:  Calculate the cost of materials, equipment, and labor

Now, let’s look at the steps to calculate the labor, materials, and other hard costs.

Step#1: Review the bid documents

This step involves a careful evaluation of the project documents, measurements, and the construction site.

• Review project documents — carefully examine the project documents, including architectural drawings and specifications. Thoroughly understand the scope of work, construction methods, timelines, and other requirements,
• Visit the site — you may need to visit the site to understand the site conditions, such as accessibility, drainage, or soil type, all of which can impact the hard costs, and
• Identify measurement units — selecting the appropriate measurement units for each item or component is important to get your costing right. For example, linear feet for piping or square footage for flooring.

Step#2: Break the project down into smaller components

Dividing the project into smaller work packages or components can help streamline hard cost estimation.

For instance, you can group projects by trade, such as electrical or plumbing. 

Or, you could break up the project into specific areas, such as walls or floors. Either way, breaking down your project into smaller pieces will make the work more manageable and less stressful.  

Step#3: Perform material takeoff

Material takeoff is a process where the contractor makes a list of all the materials needed for the project and estimates their cost.

Before calculating the cost of each material, you need to first estimate the amount of materials, and then organize the data.

One way to do this is to use standard formats, such as MasterFormat. 

Developed by the Construction Specifications Institute (CSI), MasterFormat is a widely used system to organize construction data.

In this system, the building elements are classified into groups, subgroups, divisions, and sections that cover various aspects of the project. You can find all the materials you need for your project in this list and then use a cost database to calculate the cost of each material.

To calculate subcontractor fees:

• List the specific tasks that you want to subcontract,
• Contact multiple subcontractors and obtain quotes with a detailed breakdown of costs, and
• Find out if the subcontractor charges hourly rates or a fixed fee. If they charge hourly rates, multiply the hourly rate by the estimated hours for the project.

What are the typical subcontractor fees that you can expect?

Like other hard cost categories, the fees can vary based on many factors, according to Tracy Allen:

“Geography, type of contractor, and other factors all play a role in subcontractor fees. It also depends on how much work the contractor self performs as well. For a general subcontractor doing most of the work, subcontractor costs are likely 70-75% of the total costs of a project.”

Step #5: Factor in labor costs 

To calculate labor costs, follow these steps:

• Know the labor rates — list the labor rates for all workers involved in your project, such as carpenters, plumbers, machine operators, and others,
• Estimate labor hours — consult industry experts or look into historical data to assess the labor hours (note that factors, such as skill levels and complexity of tasks can impact the labor hours),
• Account for overtime — modify the labor rates and hours if the project involves overtime work, and
• Calculate total cost — calculate the labor costs using this formula: Number of workers x Labor rates x Number of hours. For example, if a task takes 8 hours to complete for 20 laborers with the labor rate being $30 per hour, labor cost = (20 x 8 x $30) = $4800.

Tip #6: Learn how to calculate and present soft costs in your bids

Before learning how to present soft costs in your bids, you need to know how to calculate the soft costs accurately. 

Remember that some soft costs, such as temporary utility connections, are one-time expenses, while others, such as insurance, are recurring.

Here are some tips to calculate soft costs:

• List the soft cost categories — make a list of all the applicable categories of soft costs for your project,
• Collect cost information — to get the latest cost information, you can refer to market research reports, consult experts, or obtain quotes from vendors, and
• Calculate the total cost — estimate the costs for each soft cost category (insurance, design, or legal fees).

Once you arrive at the total hard costs and soft costs, don’t forget to add a markup. While the profit margin (the percentage of profit you add to the total construction cost) depends on your business goals, here are some numbers to aim for.

According to the State of Residential Construction Industry (SORCI) report, 69.7% of construction professionals said their gross profit margin was between 15% and 33% in 2022.

But, how to present soft costs in your bids?

Tracy Allen explains that you can include soft costs in fixed price contracts or in your schedule of values (a list of all items used in construction and their cost):

“Certain types of contracts such as gross maximum price (GMP) may allow you to allocate, or cost in, more soft costs and in turn allow for a markup. A lump sum may be harder to allocate soft costs into, but knowing your owner and what those costs are will help devise the best strategy in your schedule of values. It is also possible that your company will need to bury the soft costs in other lines on the schedule of values or in general conditions.”

Tip #7: Set aside a contingency budget

Including contingencies in the hard cost and soft cost estimates can help account for potential unforeseen expenses or changes in the project.  

Contingency budgets are often based on historical experience while new projects can take into account the expected difficulty or risks involved in the project.  

Here are some factors that can cause the construction budget to deviate:

• Changes to the construction schedule,
• Scope or design changes,
• Unexpected site conditions, 
• Material price fluctuations,
• Workforce availability,
• Permits or regulatory delays, or
• Natural disasters, accidents, or emergencies. 

Commonly used contingency percentages range from 10% to 15% of the total project cost, according to a study titled Construction Contingency Determination: A Review of Processes and Techniques.

However, there is no ‘typical’ contingency percentage. 

Tracy Allen weighs in on the factors that influence contingency planning:

“Building in contingency and the amount that can be built in is dependent on the current economic market, bidding strategy, and understanding how your competitor might bid, along with many other factors. Due to those reasons, there is no typical contingency bucket size.” 

Tip#8: Set construction cost estimates and track spending

Since most hard costs and some soft costs are predictable, you can set estimates for them. This allows you to align your estimates with the project’s budget and ensure that costs are appropriately managed throughout the construction process.

An easy way to set and track estimates for fixed-fee projects is to use smart project budgeting software, such as Clockify.

To set your fixed project budget, click on ‘Estimate’, under project settings and select Project budget.

There are two ways to set a project budget in Clockify: 

1. Manual option — you can set an overall project budget including hard costs and soft costs.  
2. Task-based option — you can choose to set a budget for individual tasks (design, site preparation, rentals, etc).

Some tasks, such as site preparation, may repeat each month. In this case, you can also choose to reset the estimate every month in the Project’s settings tab.

Tip #9: Invest in the right tools

In addition to project budgeting and tracking tools, here are some of the useful software tools to invest in to streamline construction cost estimation:

• Cost calculators — tools, such as RSMeans, offer cost databases, quantity takeoff capabilities, and cost breakdown structures. 
• Integrated project management systems — in a 2023 KPMG Global Construction survey, construction professionals named integrated PMIS (Project Management Information System) as the technology that offers the highest return on investment.

The right software allows you to manage project documents, collaborate with project stakeholders, monitor resource utilization, and generate customized reports on project status,

• Accounting — some key features commonly found in accounting software for construction companies include job costing, financial reporting, project management integration, tax management, etc.,
• Bidding software — these tools allow you to automate repetitive tasks, build estimates, run price calculations, and analyze subcontractor quotes, and
• Time tracking software — Construction time tracking software can help you track crew hours accurately. This helps you calculate the labor cost based on the number of hours worked and the wage rates of the workers.

Tip #10: Prioritize risk management  

From change orders and environmental concerns to natural disasters and inflation, many factors can, and will often, cause project budgets to deviate from initial estimations.

While you cannot anticipate every possible risk, you can consult industry experts and review historic data to identify potential risks and develop mitigation strategies.

Tracy Allen explains that construction is a risky industry:

“Any construction comes with risk. Construction is the only profession willing to estimate millions of dollars for a project that could last years and hope that we have thought of all the “what if’s” to be able to hit our projected margins.” 

Tracy also adds that communication and education play a vital role in avoiding challenges:

“Challenges arise when there is a lack of experience in estimating, a lack of strong reporting, a lack of understanding of historical projects, etc. Educating the estimating team and project managers, creating strong relationships between operations and finance, and providing strong information flow and reporting, along with post mortem on jobs and past performance can all help eliminate those challenges. Communication and education are key.”

Tip #11: Track every dollar throughout the project lifecycle

Staying on top of your project timelines and budget can be challenging, particularly for complex projects.

By utilizing tools that offer a tracking progress and estimates feature, such as Clockify, you can not only track your project but gain insights into your team’s performance and project profitability.

Tip #12: Plan ahead to stay within budget 

Now that you have a good grasp on how to estimate and track hard costs and soft costs, you can implement the same process for your upcoming projects.

A project forecasting software helps you schedule future tasks, set up project assignments, and publish schedules for your team members. You can then use your current data to predict future performance and budget.  

The right project forecasting software will also help you track progress and provide valuable insights into how close you are to the estimated project completion based on tracked and scheduled hours.  

This way, you can make informed decisions throughout the project lifecycle.  

Conclusion: Estimate hard costs and soft costs accurately through effective planning and tracking

As you can see, construction costs are not set in stone. 

While it can be challenging to accurately estimate hard and soft costs, we hope that this article has equipped you with the information you need to get started with construction cost estimation.

Here are the key takeaways:

• Differentiate between hard costs (materials, labor, etc.) and soft costs (permits, design fees, insurance, etc.),
• Seek advice from experts and leverage industry benchmarks to gain insights into expected costs,
• Use reliable cost databases and budgeting software for accurately estimating costs, and
• Continuously track estimates throughout the project and monitor changes to ensure project success.

With time, patience, and a willingness to adjust, you can improve the accuracy of your hard cost and soft estimation.