DIRECT VS. INDIRECT COSTS IN CONSTRUCTION INDUSTRY
Updated: Aug 21, 2019
Direct and Indirect costs are the costs and expenses that are resulting from the use of principal components for implementing construction projects.
WHAT ARE THE DIRECT COSTS?
There are certain materials or services that we must need for producing goods. Direct costs are the amount of money that we spend on those required materials or services. Further, they can be traced directly into specific cost objects, such as material costs, labor costs, commissions, equipment costs, and manufacturing supplies. These costs are computed at the beginning of the cost sheet, the report has included all the costs that are associated with production jobs. Besides, direct costs mostly are variable because the costs will be increased by adding an additional unit of a product or services. Therefore, direct costs play an important role in pricing decisions because slightly changes will directly affect the accuracy of the product budget calculation.
WHAT ARE THE INDIRECT COSTS?
Indirect costs are the expenses that require the completion of the installation but not directly to the cost object, such as project Manager salaries and wages, Quality Control costs, Insurances, Shipping and postage utilities, and Rent. Compared with the direct costs, indirect costs can be either fixed or variable. For instance, utilities and office rent are part of the indirect costs, but utilities count as variable costs while office rents are fixed costs.
SOME COMMON MISTAKES:
Inaccurate Cost Allocation: Some of the construction companies allocate costs based on direct labor costs or labor hours, but not included with indirect labor costs. Indirect labor costs are the costs that do not contribute to the production of goods or performing services directly, like the security guard of a factory who does not produce any goods since their only mission is to keep the factory safe. Hence, allocating costs based on direct labor costs or labor hours will lead to under cost allocation.
Inaccurate Cost Estimates: Many contractors may have poor budget forecasts or errors when they record accountin
g entries. Comparing actual costs with estimated costs on a monthly basis can ensure to eliminate job costs errors.
Cutoff Errors: Cutoff Errors occur when the contractors receive invoices but not recorded corresponding to the correct period.
In the construction industry, the project manager and contractor should be careful about the ways of determining different types of costs incurring in a project.
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