Overhead Cost & Project Life Cycle: When Costs Peak and How to Control
- Cost Construction Accounting
- Nov 3
- 7 min read
Last quarter, a Phoenix GC completed a $1.8M renovation with 8.5% gross margin all direct costs controlled, client paid in full. Three months later: $68,000 loss.
The culprit? Overhead spiked 340% during mobilization and closeout while everyone focused on "visible" costs. The PM burned 140 hours post-revenue managing punch lists. Retention sat uncollected for 73 days while overhead kept running.
Overhead costs are construction's silent profit killers. Most contractors track direct costs religiously but treat overhead as a year-end problem. Understanding when overhead peaks and controlling it phase-by-phase separates profitable jobs from financial disasters.
Understanding Overhead In Construction
Definition and Basic Concepts
Overhead in construction refers to indirect costs essential for project completion but not tied to specific deliverables. Unlike direct costs labor installing drywall, concrete purchased for foundations overhead includes expenses like project management salaries, site office rent, permit fees, insurance premiums, and equipment depreciation.
The challenge? These costs accumulate steadily but don't produce visible work. A superintendent spending eight hours coordinating subcontractors is 100% necessary but that's overhead eating into your margin. Project managers must factor these costs into budgets upfront, not discover them during year-end reviews.
Two Categories That Behave Differently
Fixed overhead remains constant regardless of project activity: office leases, salaried staff, annual insurance policies.
Variable overhead fluctuates with project progress: temporary utilities, daily site security, short-term equipment rentals, per-inspection fees.
Here's why this distinction matters: when a project timeline extends by 30 days, your fixed overhead might only increase marginally, but variable overhead can spike 25-40%. That security guard costing $180/day? That's an extra $5,400. Temporary power and trailer rental? Another $3,000. These "small" variable costs compound fast, and most contractors don't catch them until the damage is done.
The Overhead Curve: Mapping Costs Across Project Phases
Overhead doesn't flow evenly through a project. It peaks twice once at the beginning, once at the end with a relative valley during active construction. Understanding this curve is critical.
Pre-Construction & Mobilization
The front-loaded cost bomb. During pre-construction and mobilization, overhead costs are disproportionately high compared to revenue because billing hasn't started yet. You're spending heavily before generating a single dollar.
What's burning cash:
Estimating labor (whether you win the bid or not)
Pre-construction meetings and site assessments
Permit applications and expediting fees
Bond procurement and insurance setup
Site office mobilization: trailers, utilities, equipment staging
Project management time setting up systems, schedules, and vendor contracts
Real numbers: A $500,000 project typically requires $18,000-$28,000 in overhead during pre-construction and mobilization alone that's 3.6-5.6% of project value before you bill the first invoice. For companies bidding multiple jobs, this gets worse: if you bid ten projects and win two, you're carrying 80% overhead waste on losing proposals.
The cash flow danger: Many SMEs face their tightest cash positions during this phase. You're writing checks while waiting for the first progress payment, which might be 30-45 days after mobilization. This is when companies tap credit lines or delay vendor payments creating a debt cycle before construction even begins.
Active Construction: The Relative Valley
Once construction kicks off, overhead stabilizes as a percentage of total project expenses. Direct costs labor, materials, equipment surge into the foreground, and revenue flows steadily through progress billing. This is the "comfortable" phase where overhead feels manageable.
Overhead during active construction includes:
Project management and superintendent supervision
Quality control inspections
Schedule coordination meetings
Change order processing and documentation
Progress billing administration
Safety compliance and reporting
RFI management and submittal reviews
Why it feels easier: You're generating revenue that covers overhead in real-time. For most projects, overhead during active construction runs 8-12% of billing sustainable and predictable.
The trap: Don't get complacent. Hidden overhead still creeps in through scope changes, coordination issues, and rework. A single design conflict requiring three coordination meetings, six RFIs, and revised shop drawings can consume 40+ hours of PM time $3,000+ in overhead that nobody budgeted for.
Punch List & Closeout
The forgotten profit killer. As projects near completion, overhead costs spike again often catching contractors completely off-guard. Why? Revenue has stopped (you've billed 100%), but overhead activities continue for 30-90 days.
What's draining cash during closeout:
PM time managing punch list items (often 15-25 hours per week)
Multiple site visits for small correction items
Final inspections and re-inspections
Warranty documentation compilation
Lien releases and final billing reconciliation
As-built drawing preparation
Retention collection efforts (the big one)
The retention trap explained: On a $1 million project with 5% retention, you have $50,000 held by the owner. If it takes 60 days to collect (the industry average is actually 67 days), and your PM spends 15 hours per week managing closeout during that period, you're looking at:
15 hours/week × 8 weeks = 120 hours
At $75/hour blended cost = $9,000 in overhead on a "completed" project
Plus continued insurance, bonding costs, and administrative overhead
Total closeout overhead: $12,000-$18,000 eating directly into that retention
Many contractors don't track this because mentally, the project is "done." But financially, you're financing the owner's retention holdback with your own overhead dollars.
The Hidden Overhead Killers
Beyond the predictable peaks, certain overhead costs lurk beneath the surface, silently draining resources.
Every change order requires negotiation, documentation, approvals, and pricing typically 10-15 hours of PM time per change order. If you process eight change orders on a project, that's 80-120 hours of overhead ($6,000-$9,000) that rarely gets captured in your change order pricing.
Most contractors mark up direct costs (labor, materials) but forget to bill for the administrative burden. That's profit walking out the door.
The Estimating Waste Problem
If your win rate is 20% (bidding ten jobs, winning two), you're carrying 100% of the estimating overhead on only 20% of the opportunities. For a company spending 120 hours per month on estimating, 96 of those hours produce zero revenue. At $65/hour, that's $6,240 per month in sunk overhead $74,880 annually that must be recovered from winning projects.
Coordination Delays and the Waiting Game
Material delivery delays and inspection hold-ups don't just stall progress, they extend overhead expenses. Each week of delay costs:
Site security: $900-$1,260 (7 days × $130-180/day)
Equipment rental (if you can't demobilize): $800-$2,000
Superintendent supervision with no productive work: $2,400+
Total weekly delay overhead: $4,100-$5,700
A four-week delay due to late steel delivery? That's $16,400-$22,800 in overhead with zero revenue offset.
Technology Implementation Gone Wrong
Project management software should reduce overhead, but poorly implemented systems can increase it. If your team spends an extra hour daily navigating a clunky system (versus a streamlined one), that's five hours per week across a typical site team $375-$500 weekly in wasted overhead, or $19,500+ over a year-long project.
Control Strategies: Phase-by-Phase Playbook
Generic advice like "control costs better" doesn't work. You need specific tactics for each phase.
Pre-Construction Controls: Stop the Bleed Before It Starts
Measure hours spent per estimate
If a bid requires 30+ hours and win probability is under 30%, reconsider bidding
Analyze quarterly: which project types yield best win rates vs. estimating investment?
2. Negotiate milestone billing that captures mobilization costs
Push for 10-15% mobilization payment in contract terms
This recovers upfront overhead before you're 60 days into the project
Frame it to owners: "This ensures we can dedicate premium resources to your project immediately"
3. Standardize mobilization checklists
Prevent scope creep in setup activities
Pre-approved vendor lists reduce sourcing time
Template insurance/bond applications save 8-12 hours per project
4. Fast-track administrative setup
Submit permit applications during contract negotiation (if allowed)
Secure bonds and insurance before contract signature
Every week saved pre-construction is $3,000-$5,000 in overhead savings
Active Construction Controls: Keep the Machine Efficient
1. Implement weekly overhead pulse checks
Track PM/superintendent hours against budget (not just field labor)
Flag when supervision hours exceed plan by 10%
Review at weekly coordination meetings: "Are we managing or over-managing?"
2. Build overhead into change order pricing
Don't just mark up direct costs
Add line item: "Project management & coordination: X hours at $Y/hour"
Standard formula: 8-12% overhead factor on top of direct cost markup
3. Automate routine overhead tasks
Digital daily reports save 30-45 minutes per day (that's 2.5-3.75 hours weekly)
Integrated change order workflows eliminate redundant data entry
Real-time cost dashboards reduce "where are we?" meetings by 50%
4. Control the coordination meeting creep
Limit standing meetings to 60 minutes maximum
Require agendas 24 hours in advance
If an issue needs more than 15 minutes, take it offline with only relevant parties
Every unnecessary hour in meetings is $150-$300 in overhead across attendees
Closeout Controls: Protect Your Profit at the Finish Line
1. Establish firm closeout budgets with hour allocations
Allocate specific PM hours for punch list phase (typically 80-120 hours)
Set deadline: all punch items resolved within 30 days of substantial completion
After 30 days, escalate unresolved items to executive level
2. Implement aggressive retention collection protocol
Submit final invoice + lien release package same day as substantial completion
Follow-up cadence: Day 7, Day 21, Day 35, Day 45 (executive involvement)
At 60 days, calculate carrying cost and consider offering 5-10% discount for immediate payment
3. Delegate closeout tasks strategically
Don't use your $100/hour PM for warranty manual compilation
Assign to assistant PM or project coordinator at $45-$55/hour
Checklist with time estimates per task: prevents scope creep
4. Implement the "kill bad projects faster" rule
If retention collection exceeds 90 days, calculate total carrying cost
Sometimes better to settle for 92-95% and move on than finance another 30 days of overhead
Real calculation: $50K retention × 90 days = $12K+ in overhead carrying cost = you're financing at 24% annual rate
5. Standardize closeout documentation
Digital document management: no more "hunting for warranties"
Template close-out manuals reduce compilation time by 60%
Pre-built lien release packages save 4-6 hours per project
Conclusion: Know Your Peaks, Protect Your Profits
That Phoenix GC? They tracked overhead by phase on their next three projects and discovered mobilization consumed 4.2% of project value, closeout another 2.8%. They negotiated mobilization payments, implemented retention collection protocols, and built overhead into change orders.
Result: Next similar project delivered 11.3% net margin instead of a loss. Same work, same team different approach. Your overhead will peak at the beginning and end of every project. The question is: are you managing those peaks, or are they managing you?
Start tracking overhead by phase on your next project. You'll be shocked at what you discover and more importantly, you'll finally have the data to control it.
Ready to stop leaving profit on the table? Schedule a consultation with Construction Cost Accounting to analyze your overhead patterns and identify immediate savings opportunities.
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