How To Calculate Overhead Costs in Construction Projects: A Complete Guide

Assume that any over or under expenditure will continue to grow proportionately during the course of the project. Assuming that no other activities are affected, the manager decides to increase the expected duration of activity C to 10 days. Since activity C is on the critical path, the project duration also increases by 2 days. Applying the critical path scheduling procedure would confirm this change and also give a new set of earliest and latest starting times for the various activities. Each of the rows shown in Table 12-8 would be derived from different sets of financial accounts. Additional reports could be prepared on the financing cash flows for bonds or interest charges in an overdraft account.

Often these companies are not in a competitive bidding situation – they have been chosen as the sole contractor for a job. Whether a contractor is entitled to mark up material and subcontractors hired by the owner is a separate question. Again, this is best determine before the job begins and included, in writing, as part of the contract. Is it acceptable for us to go back to the builder on this and challenge these OH costs? We’re completely fine paying the OH on all labor and materials used in the build. The cost should NOT be adjusted during or at the end of the job because the contractor realizes that he underbid the job or forgot to add overhead and markup.

Direct vs. indirect overhead

If they decide that field labor costs are really what indicate whether their overhead costs are high or low, they might look just at that rate. By separating manufacturing overhead from other types of overhead costs, it’s possible for the business to conduct a more thorough examination of its profitability. In many ways, administrative overhead costs cannot be adjusted without significant changes to the business’ infrastructure (i.e. reducing your workforce). Manufacturing overhead, however, might be adjustable if a more thorough understanding of the costs is measured against the direct labor and material costs.

The use of database management systems in this fashion is described in Chapter 14. For easily measured quantities the actual proportion of completed work amounts can construction bookkeeping be measured. For example, the linear feet of piping installed can be compared to the required amount of piping to estimate the percentage of piping work completed.

Resources

The following are some tips for boosting your profit margin and reducing your overhead — which can increase your overall profitability. For example, in a contract worth $20,000 that required $15,000 of labor and materials and $2,500 of overhead, the remaining $2,500 is the profit. As a contractor, once you understand how to reduce your overhead and increase profits, you’ll be on your way to growing your business. Generally, variable overhead relates to supplies and utilities, like gas and electricity, that can change from one job to the next.

Typically, you would share these costs proportionally across all projects. While it’s important to stay busy, a construction company’s primary goal should be to make a profit. In 2019, the Builders’ Cost of Doing Business Study showed that profit margins increased, reaching their highest point since 2006. The departmental overhead rate is defined as an expense rate for every department in a factory production process.

CALCULATING OVERHEAD AND PROFIT

And that’s just a few of these indirect construction overhead costs. In addition to cost control, project managers must also give considerable attention to monitoring schedules. Construction typically involves a deadline for work completion, so contractual agreements will force attention to schedules.

But in today’s modern world you also have highly sophisticated construction software at your fingertips that can make job costing and accounting a breeze. Ask your website developer if there are any tools that can be built into your contractor website to help you. Correctly calculating overhead and profit can mean the difference between a job making you money or costing you money. Fail to correctly calculate on a regular basis and you could find yourself with a business that’s in debt — or doomed. Another way to properly categorize overhead costs is to ask if the cost is directly related to producing a good or service. Any cost that can’t be categorized this way is an indirect cost and as a result should be classified as overhead.

Careful — direct and indirect costs aren’t always clear

The remaining 75% would go to each of the other jobs proportionally in the same way. If done correctly, 100% of every overhead expense that hits the G/L can be accounted for under one job or another. Overhead costs represent funds that a construction business needs to operate.