Labor cost is a major component of total project cost, especially in service contracts such as design, engineering, and construction. Labor average rate is an indicator for projecting the final labor cost. Optimizing crew mix to increase labor profitability has always been a challenge for projects and bids: project managers require a reasonable degree of skills and expertise in a project when combining senior, intermediate, and junior resources. Having too many senior resources increases the average rate through higher pay rates, while having too many junior resources reduces the average rate but results in poor direction and low quality outputs ultimately resulting in delays, rework, and scraped materials. Teams need a certain level of senior resources to provide leadership, and intermediate and junior resources for less complex tasks. Suitability of labor resources should be analyzed based on the compensation terms of each contract, to make sure assigned resources are profitable.

The purpose of this paper is to introduce a heuristic algorithm identifying the main contributors to a project's labor profitability, and optimizing crew mix to increase gross margin in cost reimbursable or fixed price contracts. The optimization process aims to reduce average labor cost while keeping the revenue amount constant, and uses an algorithm applicable to both projects and bids. A flow diagram of the method and implementation of a simple hypothetical case study are also presented, along with recommendations.