Updated: Aug 7
Indirect costs in construction can often be the silent profit killers, creeping in without much fanfare and eating away at the profit margins. They're not in the spotlight, building the structure, but they keep the show running smoothly. These costs cover everything from the lights in your office to the money spent training your team.
So, how do you streamline them to maximize profitability?
Let's Define Construction Indirect Cost
Indirect costs are generally categorized into two: overhead costs and general expenses. Overhead costs are expenses tied to specific projects but not to specific tasks, like site utilities or rental equipment. General expenses refer to the overall running costs of your construction business, such as office rent, marketing, and legal fees.
To paint a clearer picture, here's a look at some examples of indirect costs:
1. Administrative Costs (Office running costs): This includes salaries of office staff, supplies, utility bills, office rent, and maintenance costs.
2. Insurance: This could be general liability insurance, workers' compensation insurance, or property insurance.
3. Training Costs: Expenses related to the training and development of your workforce.
4. Depreciation: The loss in value of equipment over time is considered an indirect cost.
5. Taxes and Licenses: All companies must pay various taxes and maintain certain licenses to operate legally.
6. Equipment Maintenance: Upkeep and repair of construction equipment fall into this category.
7. Marketing and Advertising: Costs that contribute to bringing in new business and maintaining your company's reputation.
Moreover, indirect costs can sometimes hide within direct costs, blurring their true impact. This is where construction bookkeeping comes into play. A thorough and careful bookkeeping process can help distinguish between direct and indirect costs and reveal the hidden costs affecting your bottom line.
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, construction indirect costs serve multiple projects simultaneously and will vary at times, depending upon the volume of projects.
>> Learn more: Key Difference Between Direct and Indirect
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.
Analyzing Construction Indirect Costs
Analyzing construction indirect costs is an essential aspect of financial management in your construction business. Here's a step-by-step process you can follow:
Start by identifying all indirect costs associated with your projects. These may range from administrative expenses to insurance costs, equipment depreciation, taxes, and training.
Categorize the identified costs based on their nature. Usually, these costs are divided into overhead costs and general expenses.
Allocate the categorized costs appropriately to each project. Some indirect costs can be attributed to specific projects, while others are spread over the entire business operations.
Use ratios and percentage analysis to gauge the impact of indirect costs on your financial performance. Think of indirect costs as a slice of your total expenses pie. By seeing how large that piece is, you can understand how much of your money is being spent on these unseen costs. Think of it like seeing where your hidden change goes in a "money jar".
5. Review and Monitoring:
Regularly review and monitor your indirect costs. Over time, trends may emerge, highlighting potential issues or areas for improvement.
Remember, the analysis of indirect costs can be complex due to their nature and the accounting practices involved. Construction-specific accounting or bookkeeping software can help you manage these costs more accurately and efficiently.
The Importance of Accurate Cost Estimation
A key to efficient construction management is accurate cost estimation. Underestimating construction indirect costs can lead to budget overruns and project delays. To plan your budget well, you need to know all the details about your project. Also, looking back at your old projects to see where you spent your money can really help. Think of it like looking at old shopping receipts to understand your spending.
Consider using specialized construction cost management software. These nifty tools are your secret weapon. They watch your costs, do all the number-crunching, and even shout out a warning if your budget is about to go overboard. This means your money plans will be spot on and work better for you.
>> Learn more:
Streamlining Construction Indirect Costs
So, how can you streamline indirect costs in your construction business?
Tap into the power of construction management software. Using this software is like a helper for your business – it makes things run easier, reduces mistakes, and gives you more free time. Some software even offers features tailored to managing construction indirect costs.
Here are a few options:
1. Procore: Procore is a construction management platform that enables you to manage project finances, track costs, and automate calculations.
2. Sage 100 Contractor: Specifically designed for small to mid-sized contractors, Sage 100 Contractor offers strong project management tools and detailed job costing capabilities to help you keep a handle on indirect costs.
3. Sage 300 Construction and Real Estate (formerly Sage Timberline Office): This software provides cost control and general ledger capabilities, crucial for maintaining precise records of your indirect costs.
4. Sage Intacct: A comprehensive financial management solution, Sage Intacct can handle the complexities of construction accounting, providing powerful insights into both direct and indirect costs.
5. CoConstruct: CoConstruct offers budgeting and costs forecasting features, essential for accurate cost estimations and better management of indirect costs.
6. QuickBooks for Contractors: An industry-specific version of the popular accounting software, QuickBooks for Contractors allows for detailed job costing, which can help in tracking and managing indirect costs.
Remember, it's about finding software that fits your business like a glove. You want it to slide right into how you operate. Like finding a puzzle piece that fits just right.
Implement value engineering in construction. This involves revising the project plans to optimize the value of each component, balancing cost with functionality.
Negotiate with Vendors
Negotiate prices with vendors to reduce supply costs. Bulk purchasing or long-term contracts can often secure better prices.
Conduct regular audits to identify areas of inefficiency or overspending. Doing this lets you keep an eye on your money coming in and going out, and helps you brainstorm better ways to spend your cash. It's like having a roadmap for your wallet!
Bringing in the Professionals
To manage construction indirect costs effectively, consider outsourcing your construction bookkeeping tasks to professionals. They can help identify hidden costs, provide detailed cost reports, and suggest ways to optimize expenses. A dedicated bookkeeping service, like CCA, specializes in the construction industry and is tailored to meet your unique needs.
Indirect costs in construction may seem daunting, but with the right knowledge and strategies, you can turn this challenge into an opportunity. By understanding, managing, and optimizing these costs, you can significantly increase your profitability.
Don't let those sneaky hidden costs catch you off guard. Take control today with CCA's expert bookkeeping services.