Running your own construction business can be a pretty tough task. You have to take care of many different factors to ensure all the things are going as smoothly as possible. One of the most crucial things a construction business owner should know is how to calculate overhead costs in construction projects.
If you are worried about whether you are ready to handle primary business necessities or about having visibility onto where your company is expending its money, then learning to calculate overhead costs can be one of the finest decisions you make as a business owner. Overhead is a vital factor that construction companies consider during each accounting cycle.
Overhead costs in construction projects can be a difficult task to calculate. On the outside, it looks easy as overhead is the expense of doing business. However, in reality, there are various kinds of overhead costs. It might seem intimidating to you. The good news is that you do not have to feel intimidated during calculating overhead costs in construction projects and making adjustments as required.
Whether you are an accounting expert or not, there are several methods to establish or reclaim regulation of your business finances. In this article, we will discuss everything you have to know regarding calculating overhead costs in construction projects.
What Are Overhead Costs In Construction Projects?
Overhead costs in construction projects encompass all the costs essential for your company to stay in the construction business. As a construction business owner, you will have many different costs. Some will be expenses that are not straightly connected to the creation of services or products but need to be taken into account on a continuing basis.
These expenses are known as overhead costs in construction projects. Knowing your overhead costs in construction projects is necessary for tracking your finances and for budgeting objectives. Also, they are one of the most vital factors to consider when pricing your services or products. As a result, you may make some profit.
Types Of Overhead Costs In Construction Projects
There are 2 different types of overhead costs in construction projects. They are-
Direct Overhead Costs
Direct overhead costs are generally easier to calculate. These are the overhead costs that are straightly related to a particular construction project. For instance, every material that is used for a construction project is direct overhead costs.
The cost of the labor, equipment rental, permits, parking charges, subcontractors, mobilization expenses, court charges, fines, and anything associated with only one construction project are direct overhead costs.
Indirect Overhead Costs
These overhead costs are the behind-the-scenes expenses that you cannot relate to only one construction project. They are frequently the reason for lower than anticipated profit margins and incorrect bids. After you handle the direct overhead costs, determining which overhead costs are indirect is a little bit easier.
For instance, the expenses of marketing, the salaries of office employees, uniforms for employees, office supply orders, rent for storage, cell phones, vehicle expenses, holiday bonuses, equipment buying, and office parties are indirect overhead costs.
How To Calculate Overhead Costs in Construction Projects?
We will use the overhead cost calculating formula of combining the fixed monthly costs and indirect expenses to calculate the overhead costs in construction projects in the guide below. You need to follow the following steps to calculate the overhead costs in construction projects.
Combine All Monthly Fixed Costs
To determine your overhead costs in construction projects, you need to combine every fixed expense your company covers every month. For instance, assume a construction business disburses $12,500 each month for property costs, $2,000 each month for loan commitments, $6,500 each month for tax commitments, and $600 each month for company automobile insurance.
The construction business calculates $21,600 for every month’s accounting cycle by combining these monthly fixed costs.
Add Up Indirect Expenses
Indirect expenses can include both fixed costs and variable. To calculate overhead costs in construction projects correctly, you need to calculate both types of expenses if your construction business has them. Using the previous instance, guess that the construction business has calculated its fixed indirect expenses.
Suppose the company disburses $24,500 each month in administrative salaries, $5,500 in vendor contracts, and $4,500 in worker benefits coverage. In that case, its total fixed indirect expenses amount will be $34,500. The company will then combine every variable indirect cost, like any equipment maintenance or additional office supplies, and will add these values to its fixed indirect expenses.
Suppose the example company adds $350 for extra office supplies and $700 for vehicle maintenance into its fixed indirect expenses. This calculation means that the company’s total indirect expenses amount will be $35,550.
Combine Monthly Fixed Costs And Indirect Expenses
After calculating all indirect expenses and fixed costs your company covers every month, you can combine them together. The result will give you the total overhead costs in construction projects and can give you important insight into your construction business’s spending patterns.
Using the prior instances, suppose the same company wants to calculate its total monthly overhead costs in construction projects for the previous accounting cycle. They used the overhead cost calculating formula of combining the fixed monthly costs and indirect expenses.
As a result, by combining their fixed monthly costs of $21,600 with their indirect expenses of $35,550, they found their total monthly overhead costs in construction projects are $57,150.
Overhead costs in construction projects are inescapable, but knowing how to control them, how they work, and how to account for them, makes for a better construction business. When you want to find out that your construction business has become successful, you should be eager to dive deep into the habits and practices that encourage business development.
By learning the overhead costs in construction projects, you won’t just be able to answer for all dollars that your business pays, but you will be better prepared to make long-term decisions that impact both you and your staff. We are hopeful that after reading this article, you have now learned how to calculate overhead costs in construction projects.