How to Calculate Overhead Costs in Construction Projects.
A comprehensive guide to determining overhead costs for construction and industrial assembly companies…
How to Calculate Overhead Costs in a Construction Company
Time needed: 4 minutes.
How to Calculate Overhead Costs in a Construction and Erection Company.
Overheads are indirect costs that remain constant regardless of the company’s production levels.
These costs include:
- All salaries of technical, administrative, and maintenance staff (not construction)
This includes indirect company hours in engineering, budgeting, quality control, purchasing, sales, administration, accounting, finance, legal, cleaning, security, etc. departments.
- Movable and immovable property expenses (not construction)
movable and immovable property expenses (not construction)These expenses cover the acquisition and depreciation of movable and immovable property, the maintenance of such property, the rental of buildings, etc.
- Office expenses (not construction)
Expenses for the purchase of supplies, travel, marketing, banking services, telephone bills, electricity, gas, water, Internet expenses, postal fees, etc.
- Tax, insurance, and financial expenses (not construction)
Taxes: It comprises taxes that are paid even without works.
Insurance: Includes property insurance, a guarantee of maintenance of the proposal, car insurance for members and shareholders, etc.
Financial expenses: Financial expenses are understood to be costs incurred by a company for the use of capital made available to the company by third parties.
Overhead Costs of Construction and Industrial Assembly Company
This publication examines the overhead costs of construction and industrial assembly company, which provides services for the execution of:
-New industrial projects.
-Modification and/or expansion of existing industrial facilities.
-Engineering services.
-Work-site management.
-Inspection services, etc.
The following figure shows each of the steps the estimator must complete preparing a bid. The figure identifies the calculation of overhead cost.
How to Calculate Overhead Costs in Construction Projects – Control of Overheads
Adequate control of overheads is essential.
Uncontrolled overhead costs can lead to a company’s bankruptcy.
The classic example of a small company with disproportionate overhead costs is a construction and assembly company that, from the beginning of its activities and without a contract in sight, risks setting up a large office in the most expensive sector of the city.
At the beginning of any business, it is prudent to spend as little as possible until the income justifies a greater expense.
Overhead Costs – Calculating the Percentage of Overhead
To calculate the overhead percentage, divide the company’s overhead in a period by its sales in that period.
Just for reference: My company’s overhead always ranged from 15% to 10% of sales.
Each company has its historical overhead percentage for a period; this preceding percentage is what the estimator uses to allocate the overhead charges to the new budgets.
For certain projects, companies manage the amounts to be allocated for overhead according to their sales policy to submit more competitive bids.
Cost leadership strategy
Steps to implement a successful cost leadership strategy:
-Generate a reliable and detailed budget for each of the projects.
-Always consider the use of the latest technological advances in the execution of the projects.
-Optimize the performance of direct and indirect labor through incentives, training, the use of special tools, etc.
-Reducing overhead costs to what is strictly necessary.
-Orient the activity of the workers toward favoring the reduction of costs.
-To comply with the quality and safety requirements indicated in the specifications.
-To respect the current labor legislation, etc.
The estimated overhead cost per project is an amount that arises from considering all the aspects outlined above.
In the next post we will analyze how to Calculate the Cost of Insurance for industrial construction and assembly works.