erhaps one of the most important topics that all construction companies need to consider, indirect costs require proper tracking and allocation to achieve financial success. Every construction business knows “their cost” because it affects project bids directly; however, not accounting for indirect costs can actively deteriorate gross profit or result in negative financial consequences for their company. In this article, we will explore 3 factors that construction businesses should consider in their existing company processes.
Construction businesses should be able to split their costs into four unique categories: indirect costs, direct costs, SG&A, or separate expenses like taxes. While direct costs are easily identified, indirect costs include project-related expenses that may not be identifiable with one specific contract. This could include indirect labor, union costs, payroll taxes, equipment repairs, salaries, insurance, and much more. Unfortunately, this means that as work volume changes, indirect costs could fluctuate as well and cause even more uncertainty.
For the best result, construction businesses should determine a cost driver that systematically allocates costs to projects. In most applications, indirect costs associated with labor will be allocated based on project labor hours; however, this may change based on equipment needs or costs that may arise. Construction businesses need to have a system in place to accurately predict indirect costs associated with projects before bidding to ensure they are financially receiving the best outcome possible.
One final thing that should be considered when determining how indirect costs are affecting a construction business is to perform an annual review that determines whether the allocation model that is currently in place accurately reflects incurred costs. Without reviewing this data, many construction companies will place incorrect bids on future projects and chip away at their final gross profit margins. If a systematic allocation system for indirect funds is in use, knowing this data is critical and may warrant the need for manual allocations to be built in specifically for special projects or circumstances that may occur in the next year.
Understanding the enormous impact that indirect costs could have on a project bid can be incredibly challenging for construction companies – particularly when they have high competition levels for the same project. Understanding the true cost of a project and the resources that it will require to be completed is imperative for financial security. By taking the steps necessary to account for indirect costs, construction businesses can bid smarter while still ensuring they are making a profit.