Materials. Labor. Equipment. Subcontractors.
Trying to keep track of costs in the construction industry can be mind-boggling.
And how do you determine what’s a direct cost, and what's an indirect cost?
If you're confused about how to manage costs in your construction business, read on. This article will discuss direct and indirect cost in construction, so you can be sure you are bringing in top profits.
Keeping up with direct and indirect cost in construction can get complex.
Honestly, it can be a huge headache. This is where Flexbase shines.
Flexbase integrates with your accounting software to track all your costs.
Plus, contractors can use Flexbase to:
And Flexbase is completely free to use, so you can put an end to subscriptions that you have to pay for even when you don’t get paid.
Indirect cost in construction is any expense that is not specifically related to a particular project, but is required as a part of the construction process. Generally, indirect costs benefit multiple projects simultaneously and will vary at times, depending upon the volume of work.
The easiest way to distinguish between direct cost and indirect cost in construction is that direct cost refers to the expenses specific to the construction project, and indirect costs are any expenses that remain.
Direct costs are also known as project overhead costs and are the expenses that are directly linked to the physical construction of the project.
Sometimes also referred to as “unburdened” or “bare” costs, direct costs include:
Direct costs are very specific and are generally easy to assign to a specific construction contract.
In contrast, indirect construction costs cannot be specifically allocated to contracts.
The following are typically included as indirect cost in construction:
If you're a business owner, understanding the difference between direct and indirect cost in construction will help you to:
And not only that, but having a good understanding of indirect cost in construction is also hugely helpful when tax time rolls around. Some indirect costs — as well as some direct costs — are tax-deductible.
Tax-deductible indirect costs may include things such as:
Of course, every company’s situation will be different, so be sure to consult with your accountant to see exactly what qualifies for your situation.
Now that we’ve answered the question, “What are indirect costs in construction,” we need to decide how we’ll go about allocating those costs.
While indirect cost in construction doesn’t relate to specific projects, it still needs to be equally distributed between all of your projects and included in your overhead expenses. Indirect costs affect your gross profit on projects and must be considered when calculating the overall profit.
When it comes right down to it, how the costs are allocated is not nearly as important as making sure that they are consistently allocated on a regular basis.
Indirect costs are harder to classify.
We've determined that indirect costs can't be directly allocated to a specific project, and costs sometimes cover multiple projects.
An easy way to keep track of indirect costs is to create different cost pools to help you categorize your indirect costs.
For example, you may choose to allocate your indirect costs in the following categories:
Job costing refers to a method of calculating the actual cost of working on a project. It takes into consideration the overall project, breaking it down into smaller, specific tasks.
This is beneficial throughout the entire life of your project — from bidding to knocking out the punch list.
The truth is, if you don't have proper job costing, anything else you're doing will just be a shot in the dark.
As a contractor, there are quite a few methods you can choose from to allocate your indirect costs, such as:
The important thing is that whatever method you choose, it must:
Tracking data gives insight, and by tracking your indirect costs, you will have a more accurate look at the profitability of a given project.
Successful tracking of indirect cost in construction will help you maintain accuracy when it comes to:
You'll also want to take a good hard look at your accounting software.
Is it capable of distributing costs the way you want it to?
Can it track your indirect — and direct costs — and apply allocation in the ways you need it to do?
The Flexbase cash flow management system can.
Our app easily integrates with your accounting software to track both your direct cost and indirect cost in project management.
If you’ve been in the construction industry for more than a minute, you know just how quickly things can change.
This is why you need to evaluate your rates, at least quarterly, for accuracy.
If you notice an accumulation of over or under-applied cost pools on your financial report, then you’ll need to take a closer look in order to determine if adjustments should be made.
Of course, you will want to keep in mind that there can be seasonal variations in projects that may lead to temporary over or under-cost accumulation.
Additionally, payouts of project manager bonuses or making bulk purchases of non-inventory supplies can also cause temporary fluctuations. In these situations, it may be unnecessary to adjust rates
When you're working on labeling indirect costs, you want to be sure to avoid some pitfalls. Common mistakes contractors often make include:
Keeping up with all the costs by maintaining quality records is the best insurance you have when it comes to avoiding potential problems.
Keeping track of your direct and indirect cost in construction can be time-consuming and tricky, but Flexbase can help you stay on top of costs and spending and improve your profit margins.
Indirect construction costs affect your overall project cost totals, and if you want to be sure that you're getting paid for them, you need to make sure they are included in your bids. But before you can do that, you have to know exactly how much your indirect costs are costing you.
This is why tracking your indirect costs is so critically important, and you can do that by setting up general ledger accounts to track your individual indirect costs. Once you've accumulated about three months’ worth of tracked costs, you can begin to allocate those totals to your active projects within that time frame.
Of course, you will want to be sure to recalculate your indirect cost allocation each time you allocate cost since your indirect costs will vary depending on how busy you are at that time.
And just to be sure that you receive your payment for indirect costs, remember to always protect your payment rights by filing the correct notices and a mechanic's lien, if necessary.
Flexbase takes the hassle out of managing your indirect costs.
Let us take care of all your construction paperwork, including:
The Flexbase platform integrates fully with the accounting software you already use, so your transition will be seamless.
Our resources are 100% free to use. You don’t pay Flexbase unless you get paid.