Updated: Mar 21
Have you ever wondered why profit margins consistently deteriorate at the end of your construction projects? The key problem is whether your project manager and your accountant in your construction company are actually understanding and controlling the costs.
Construction costs are split into two categories: indirect and direct. Honestly, keeping up with direct and indirect costs in construction is complex and can be a huge headache. So if you’re confused about costs in construction, read on.
Knowing and understanding your cost can help you determine budget planning for construction projects, improve the bidding process and gain insight into profitability. This article will discuss indirect cost in construction, so you can ensure you are bringing in top profits.
What is an indirect cost in construction?
An indirect cost in construction is an expense that is not specifically allocable to a particular project but is required as a part of the construction process. These costs do not have a direct connection with the operation of a construction project. For example, the costs of administrative and salaries for office staff are accountable for an indirect cost. The four most common types of indirect costs include:
Administrative and office staff: construction indirect costs have to cover salaries for office personnel like construction bookkeepers, accountants, office assistants, project managers, superintendents, and other staff. Construction companies are also responsible for labor burdens such as FICA taxes, workers' compensation, vacation, and other fringe benefits.
Mortgage, rent, and utilities: Indirect costs to maintain an office space may include office rent or mortgage payment, utility bills, and other costs related to maintaining a business property.
Marketing and promotional activities: Many construction companies may take on costs associated with promoting their brands, finding clients, and initiating contracts. Costs of marketing and promotional activities are accountable for indirect costs and they are necessary for business growth.
Miscellaneous costs: Office trailers, office equipment, shipping and postage costs, travel expenses can also be a part of a business’s indirect cost.
What is the difference between construction indirect costs and direct costs?
Contractors take on a wide range of expenses that directly and indirectly relate to projects and business operations. Although indirect costs are not specifically allocated to particular contracts, they are essential to business function, keeping a process and project running. Generally, indirect costs serve multiple projects simultaneously and will vary at times, depending upon the volume of projects.
This is as opposed to direct costs, which are those costs incurred directly and inherently for each project a business takes on. Direct costs can include materials, labor, equipment, power, and so on. These items are traced and are attributed to a project.
Tips to Streamline Your Indirect Costs to Boost Construction Profits
After all, indirect costs, accompanied by direct cost constitutes the total costs of a particular job and determine how profitable the project is.
Depending on the project, companies may cover the different indirect costs to successfully perform project tasks. They affect a business’s gross profit s it earns from completed projects. Thus, you need to analyze and streamline your indirect costs to cut down on unnecessary costs and improve the final outcome.
The following tips outline several approaches to streamline indirect cost in construction:
Track and record spending continuously
It’s important to classify your indirect costs and understand how general and administrative costs affect fund allocation. Therefore, consistently tracking and updates to the expense records can ensure your indirect cost allocation is accurate. Keeping timely records and being sure to include all costs during the entire project will help avoid any potential risks.
Apply accounting software
Tracking and recording costs is a challenging job. While you have to get work in the field, you also keep a closer eye on the company’s financial health. Fortunately, construction accounting software can bring convenience and accuracy to manage your costs. With accounting software, it helps you keep indirect and direct coast, manage your budgets and ensure you stay on track.
Evaluate costs for rate adjustments
When you have a better estimate of your project spend, you can compare forecasted and historical rates so you can make adjustments to better streamline your indirect cost. The ability to modify rates between projects is important for your company to achieve business goals, generate revenue, and remain profitable.