Construction Overhead Costs: Key Difference Between Direct and Indirect

Overhead costs are all costs associated with any construction or renovation project, and they make up generally a substantial portion of the total cost. This is why can make the difference between a profitable project and a failure.

As a contractor, deeply understanding construction overhead is the first step to figuring out how to keep project overhead low and gain better control of your spending.

Overhead costs are split into two categories direct and indirect costs (or general overhead and job overhead). While direct overhead costs are allocable to a specific job, indirect costs are not. Both of which are covered in more detail in this article.

General Overhead Costs (Indirect Expense)

Office Expense

Office expense would include any office rents. This also consists of office supplies, utilities, insurance, phones, office equipment, furniture, and taxes.

Staff Salaries

Salaries of employees working in the offices and not directly employed on a specific project are calculated as a part of the indirect costs. The staff could be executives, purchasing staff, bookkeepers, estimators, administrative staff, etc.

Miscellaneous Indirect Overhead Costs

Some examples of miscellaneous cost miscellaneous costs would be postage, printing, travel expenses, legal fees, marketing, and advertising, and contracted professional services.

Depreciation Expense

Depreciation expense is that portion of office equipment or construction equipment that has been written off each year as part of a general expense and cost of doing business.

In construction, smaller contractors will have fewer indirect costs and larger contractors will have more. Many companies manage to lower this type of cost to provide a more competitive advantage when bidding work.

Job Overhead Costs (Direct Expense)

Direct costs, also known as job overhead costs, includes all costs that be directly charged to a specific project and changed from one to one. They are also unique and are required to successfully construct the project.

Items that may be included in construction direct costs are as follows:

Project Specific Salaries

Project specific salaries differ from office salaries. They include wages, payroll taxes, and benefits paid to employed project superintendents, foremen, field engineers, project schedulers, and other employed on-site staff. Reimbursable expenses such as travel or per diem expenses also are added. These costs are estimated based on a burdened hourly, weekly, or monthly rate multiplied by the amount of time an individual is expected to be on the project.

Temporary Office Facilities

In some projects, contractors may be required to temporary office space for outsourced workers, architects, or owner’s representatives. Mobile office trailers, for example, are required for the field staff to conduct business and meetings.

Other costs such as sanitation facilities and drinking water for on-site staff and workers may be charged as direct costs.

We hope that this article cleared your confusion about construction overhead costs. If you want to simplify the bookkeeping process for your small construction business, Construction Cost Accounting is here to help. Powered by dedicated bookkeepers and modern accounting software, we will help keep track of your expenses accurately, keep a closer eye on your cash flow and provide you with an overview of your business financial health. Start a Free Consultation here.

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