How to Calculate Overhead Costs on Construction Projects. Overheads costing. This article provides a comprehensive overview of overhead costs, including what they are, how they are calculated, and how to reduce them.
How to Calculate Overhead Costs in Construction Projects
Overheads costing in Construction Projects. Overhead refers to current business costs that are not directly related to the execution of an industrial building or assembly project.
Identifying overhead costs is not only important for budgetary purposes, but also to determine how much a company should charge for the overhead of its new projects in order to achieve a profit.
Where do overhead costs come from?
Overheads costing. Construction companies calculate the general expenses of their projects through the evaluation of the 4 items mentioned below.
First, consider all technical, admin, and maintenance staff salaries (not construction projects)
Examples: this includes the company’s indirect hours of engineering, budgeting, quality control, purchasing, sales, administration, accounting, finance, legal, cleaning, security, etc., departments.
The image shows a summary prepared by the author regarding typical general expenses for construction and / or assembly projects.
Then, add the expenditures related to movable and immovable property (not construction projects)
Examples: this expenditure covers the acquisition and amortization of movable and immovable property, the maintenance of such property, the leasing of buildings, etc.
Also, add office expenditures (no construction project)
Examples: expenses for the purchase of supplies, travel, marketing, banking, phone bills, electricity, gas, water, internet, postage, etc.
Finally, include taxes, insurance, and financial costs (no construction projects)
- Taxes: This includes taxes payable even without work.
- Insurance, Examples: Includes property insurance, proposal maintenance coverage, car insurance for members and shareholders, etc.
- Financial costs, Examples: Financial expenses are the costs a company incurs for the use of capital provided to it by third parties
What is the best method of estimate overheads in a small construction company?
Firstly, on the basis of the 4 elements listed above, we can make a complete list of our overhead costs over a period of time.
The result gives us the general expenses of the construction company for that project.
How can overhead be allocated on a new project?
Based on the type of work performed by the Contractor, they may be distributed as follows:
- Allocate overhead costs based on the number of direct labor hours for each project.
- Allocate indirect costs based on the material costs of each project.
- Allocate indirect costs, according to the square meters of the project.
- Assign overhead costs as a percent of direct costs incurred for each project.
What is the percent of a construction company overhead over a certain period?
To obtain the percent of overhead, divide the above total of total sales for this period and multiply by 100.
The overhead cost formula is:
This percent represents what the estimator uses to assign overhead to the new budgets.
On average, construction overhead can range from 5 to 15 percent of direct costs.
However, it is important to note that the actual overhead percent can vary significantly between different construction companies and projects.
It is essential that construction companies carefully analyze and manage their overhead to ensure their profitability and competitiveness.
How to reduce overhead costs? / How to Calculate Overhead Costs on Construction Projects
Reducing overhead costs is a crucial aspect for construction contractors to be competitive and increase their profit margins.
Here are some specific ways to achieve this in the construction industry.
Firstly: Use common sense
Reduce overhead. If we use common sense, we can achieve an optimal level of overall spending.
Reducing general expenses to what is strictly necessary is a crucial step to maintain the financial health of the company
Rent your office space
At the beginning of any business, it is advisable to work with minimal overhead, until income justifies a larger investment.
Regular Financial Analysis
Conduct regular financial analysis to identify areas of high overhead costs and implement strategies for improvement.
Be realistic in your bidding process to avoid underestimating costs and facing a financial strain during the project.
Reduce overhead. Utilize construction management software and digital tools to streamline processes, reduce paperwork, and enhance communication.
Monitor labor productivity and identify areas where improvements can be made to complete tasks more efficiently.
Ensure your personnel are well-trained and skilled to reduce errors, rework, and accidents. Well-trained employees work more efficiently.
Look for ways to reduce office-related costs, such as paper usage, printing expenses, and office supplies.
Compare your overhead costs to industry benchmarks to identify areas where your costs may be higher than average, and take actions to improve those aspects.
By implementing these strategies and regularly reviewing their overall costs, construction contractors can streamline their operations, improve profitability, and remain competitive in the industry.
Some companies take risks by reducing the amount allocated to overhead in a budget to present a more competitive offer.
This happens when the depreciation cost of heavy machines used in construction is decreased or lowered, for instance.
Overheads Costing in Construction Projects / Calculate man-hours