Adjusting for Labor Risk in Your Estimates

Article written by: Allan Goodwin

Labor is the biggest risk in almost every electrical estimate, and risk ratio is the simplest way to measure it. Risk ratio is total profit divided by total labor dollars. It tells you how far labor can run over before the profit on a job is gone. Once you know it, you can price labor-heavy jobs with more protection and price low-risk jobs more competitively.

I’ve been asked many times to explain risk ratio as it applies to electrical estimating. It sounds complicated, but it isn’t. This article covers why labor carries so much risk, how to calculate risk ratio, and how to use it when you apply overhead and profit to a bid.

Why Labor Is the Biggest Risk in an Electrical Estimate

Material is the more predictable part of an estimate. You can price it from supplier quotes and pricing services, and the quantities come straight from the drawings. Labor depends on how the work actually goes in the field, and nothing eats into profit faster than a job that goes over on labor hours.

Your crew will run into installations that are harder than anyone expected when the job was bid. Common causes of labor overruns include:

• Installations that are more difficult than the drawings suggested
• High mounting heights, congested ceilings, and restricted access
• Occupied or operating buildings and renovation work
• Overtime, shift work, and accelerated schedules
• Weather, which slows outdoor and unconditioned work
• Delays from other trades, and unscheduled downtime

Downtime is the one that’s easiest to overlook. In my first year as an apprentice, back in the mid-1980s, I learned a lot more than electrical wiring. The first time I volunteered for Saturday overtime, I was surprised to learn that the first hour was spent napping in the van. Years later, as an estimator, I always worried that some of those guys were working for us. Labor is risk. So many things can go wrong, and every one of them costs you money.

What Is Risk Ratio in Electrical Estimating?

Risk ratio is the total profit on a job divided by the total labor dollars. It compares the profit you expect to make with the labor dollars you’re committing to the job.

That last point is what makes risk ratio useful. A risk ratio of 25% means labor can overrun by 25% before the job stops making money. A risk ratio of 10% means a 10% labor overrun leaves you with no profit at all. The lower the number, the less room you have for things to go wrong in the field.

Risk Ratio Example: Two Jobs, Same Profit

Here are two jobs that each cost $400,000, priced with a flat 10% profit on cost. To keep the math simple, the example looks only at material, labor, and profit.

• Job A (labor-heavy): $150,000 material and $250,000 labor. Profit is $40,000, so the risk ratio is $40,000 ÷ $250,000 = 16%.
• Job B (material-heavy): $300,000 material and $100,000 labor. Profit is also $40,000, so the risk ratio is $40,000 ÷ $100,000 = 40%.

Both jobs show the same profit on paper, but they carry very different risk. On Job A, a 16% labor overrun wipes out the profit. On Job B, labor would have to run 40% over before the job loses money.

How to Reduce Labor Risk: Weight Overhead and Profit Toward Labor

So what can you do about labor risk? The answer is in how you apply your overhead and profit. Many companies spread overhead and profit evenly across material, quotes, labor, subcontracts, and everything else. To account for labor risk, put a larger share of your overhead and profit on labor and a smaller share on material.

Here are the same two jobs, priced with 4% profit on material and 18% profit on labor instead of a flat 10%:

• Job A: profit rises to $51,000 and the risk ratio rises to 20.4%. The bid goes from $440,000 to $451,000.
• Job B: profit drops to $30,000 and the risk ratio is 30%. The bid goes from $440,000 to $430,000.

Total profit across the two jobs barely changes ($81,000 instead of $80,000), but it now sits where the risk is. Job A has a bigger cushion against labor overruns, and Job B is $10,000 more competitive.

You may be thinking that this also makes you less competitive on labor-heavy jobs, and you’d be right. That’s the trade-off. If you take on the riskiest jobs, you’re going to take a hit on one of them at some point. Weighting overhead and profit toward labor means that when you do win those jobs, you have more cushion to absorb the problems. On lower-risk work, you can sharpen your price without exposing the company.

Before you change your markup structure, confirm the overhead method and percentages with your company’s financial leadership or accountant. The same percentage produces a different result depending on whether it’s applied to cost, selling price, or labor.

Practical Steps for Managing Labor Risk in Your Bids

Risk ratio works best as part of a consistent bidding process. A few habits make a big difference:

• Check the risk ratio on every bid. Agree on a minimum with leadership, and take a second look at any bid that falls below it.
• Apply overhead and profit by cost category. Labor, material, quotes, subcontracts, and equipment don’t carry the same risk, so they shouldn’t carry the same markup.
• Adjust labor for job conditions before you mark it up. Mounting height, floors above grade, run length, and difficult access all change how long the work takes.
• Account for the schedule and the environment. Overtime, shift differentials, accelerated schedules, and weather all cut into productivity.
• Compare new bids with past jobs. Labor hours per square foot and cost per square foot on similar work will show you when a bid looks light.
• Track your results. Watch which jobs you win and lose, and how labor actually came in on the jobs you won, so your markup reflects real experience.

How IntelliBid Helps You Measure and Manage Labor Risk

IntelliBid builds labor risk into the estimating process, from takeoff through the final bid:

• Risk Ratio on every bid. The Job Info tab in Bid Recap shows the risk ratio, along with cost per square foot and labor hours per square foot.
• Overhead and profit by category. Bid templates can apply separate overhead and profit percentages to material, quotes, labor, equipment, subcontracts, and direct job costs. The Overhead and Profit calculators support tiered rates by job size, using either margin or markup.
• Labor Levels and Automatic Labor Factoring. Choose from six labor levels for a job’s overall difficulty, and let Auto Labor Factoring adjust install time for mounting height, floors, and run length.
• Labor and weather calculators. Account for overtime, shift differentials, accelerated schedules, productivity loss, weather, and labor escalation on multi-year jobs.
• Bid Analysis (IntelliBid Pro). Compare a new bid with similar past jobs by total, percentage, cost per square foot, or profit.
• Win-rate reporting with Conest Connect. Track bids won, pending, and lost by estimator and customer, so your markup decisions are based on real results.

See which features are in each edition in the IntelliBid features comparison, or watch a quick introduction to IntelliBid below.

Back to the Basics of Business

Estimators and business owners need to get back to the basics. The goal of any business is to make a profit, and in electrical contracting, labor is where that profit is most at risk. Knowing your risk ratio and weighting your overhead and profit toward labor are small changes to the way you bid, and they can go a long way toward improving your company’s bottom line.

For more on building accurate bids, read The Art of Accurate Bidding: Tips for Electrical Estimators and Cost Analysis in Electrical Contracting. If you’re evaluating new software, our guide on how to choose electrical estimating software in 2026 covers what to look for.

Labor Risk and Risk Ratio: Frequently Asked Questions

Ready to Bid With Your Labor Risk in View?

The next step is seeing these numbers on your own jobs.