The Ultimate Guide to Managing Construction Overhead Expenses
- Cost Construction Accounting
- Aug 31, 2024
- 5 min read
Updated: Feb 11
Construction overhead expenses are one of the most important but often forgotten parts of managing money in the construction business. Overhead refers to the ongoing indirect costs required to keep a construction business operational, such as rent, salaries, and insurance, which are not tied to specific projects. Overhead costs are all costs associated with any construction or renovation project, and they make up a substantial portion of the total cost.
These expenses are a key component of overall construction costs, and understanding and managing them effectively can make a big difference in your company’s profitability.
Construction Overhead Expense Definition?
Overhead expenses for construction business in construction are the indirect costs that are needed to run a construction business every day but can't be directly billed to a specific job. These can include:
Office rent and utilities: The cost of keeping your business space in good shape.
Administrative salaries: Wages for staff who manage the business rather than work on-site.
Insurance premiums: Coverage such as general liability, workers' compensation, and vehicle insurance.
Depreciation of equipment: The wear and tear that happens over time to construction tools.
Office supplies and software: Costs for maintaining the office and necessary technology.
These expenses are necessary to keep your business running, but if you're not careful, they can also cut into your income.
Why Managing Overhead Expenses Important?
Poor management of construction overhead expenses can lead to shrinking profit margins, making it difficult for your business to stay competitive. By effectively managing these costs, you can:
Improve profitability: Cutting down on costs that aren't necessary frees up money that can be used to grow the business.
Enhance project bids: Correct overhead allocation ensures that your bids are competitive without underestimating costs.
Improve financial stability: Consistent overhead and profit construction management contributes to a more predictable cash flow.
Strategies for Construction Overhead Expenses
It takes careful planning, regular monitoring, and strategic decision-making to effectively manage construction overhead expenses. Here are some ways to help you control and reduce your overhead costs:
1. Regular Overhead Construction Expense Reviews
Reviewing your overhead costs on a daily basis can help you find costs that aren't necessary. By carefully going over your financial records, you can find places where you can cut costs without affecting how your business runs.
2. Optimize Resource Allocation
Make sure that your resources - including human, financial, or material are used efficiently. For example, assigning non-billable staff to multiple projects can help spread out the costs of overhead better.
3. Make Use Of Technology
Investing in construction management software can streamline various administrative tasks, which can cut down on the need for too many employees and mistakes in keeping track of expenses.
4. Outsource Non-Essential Tasks
Consider outsourcing tasks that are not central to your construction projects, such as IT support, HR, or payroll management. By turning set salaries into variable costs that change based on usage, this can cut your overhead costs by a large amount.
5. Talk To Vendors About Better Terms.
Check your contracts with service providers and suppliers often. You can lower your continued costs and lower your overhead by negotiating better terms.
Common Mistakes to Avoid
Managing overhead costs in the construction business can be challenging, and many contractors fall into common traps that hurt their bottom line. One frequent mistake is failing to accurately track and allocate overhead costs to individual jobs. When overhead isn’t properly assigned, you risk underpricing or overpricing your projects, which can lead to lost business or reduced profitability.
Another pitfall is neglecting to regularly review and update your overhead rate. Market conditions, business growth, and changes in expenses can all impact your overhead costs, so relying on outdated rates can result in inaccurate pricing. Additionally, using a fixed overhead rate for all projects ignores the unique characteristics and requirements of each job, leading to misallocation of costs.
To avoid these mistakes, make it a habit to review your overhead costs and rates regularly, and tailor your overhead allocation to the specifics of each project. By staying proactive and detail-oriented, you’ll ensure your business remains competitive and your projects deliver the desired profit margin.
Allocating Overhead Expenses to Projects
One of the challenges in construction accounting is accurately allocating overhead costs to each project. This allocation is crucial for ensuring that your project bids are correct and that you maintain healthy profit margins.
Questions You Might Ask:
1. How much of my budget should go toward overhead expenses?
Typically, overhead expenses should make up about 10-20% of your total budget. However, this percentage can vary depending on the size of your business and the complexity of your projects.
2. How should I allocate overhead expenses to my projects?
You can allocate overhead expenses based on several methods, including a percentage of direct costs, a fixed fee per project, or an hourly rate applied to labor hours. The best method depends on your business model and the type of projects you undertake.
3. What are the risks of improper overhead allocation?
If overhead is not allocated correctly, it can result in inaccurate project costing, which might lead to underbidding or overbidding. This, in turn, can affect your profitability and competitiveness in the market.
Example: Overhead Allocation Method
Suppose you decide to allocate overhead based on labor hours. If a project requires 1,000 labor hours and your annual overhead is $200,000, you might allocate $20 of overhead per labor hour ($200,000/10,000 hours). This means if the project requires 1,000 hours, it would incur $20,000 in overhead costs.
The Role of Bookkeeping in Managing Overhead
Accurate bookkeeping is fundamental to managing construction overhead expenses effectively. Good bookkeeping practices help you track all construction company expenses meticulously, making it easier to keep an eye on your overhead costs and make smart financial choices. Overhead costs are reflected as part of the expenses on the income statement, which helps differentiate fixed operating costs from direct production costs.
Example: if your overhead costs go up all of a sudden, your accounting records can help you figure out why, such as a spike in utility costs or higher-than-expected maintenance expenses.
Conclusion
Managing construction overhead expenses is critical to the long-term success of your business. By implementing the strategies outlined in this guide such as conducting regular reviews, optimizing resource allocation, and leveraging technology - you can reduce your overhead costs and improve your bottom line.
Contact Construction Cost Accounting today for expert construction bookkeeping and accounting services. Let us help you manage your expenses and increase your profitability. Don’t wait, secure your business’s financial future now!
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