How to Calculate Overhead Costs on Construction Projects. This article provides a comprehensive overview of overhead costs, including what they are, how they are calculated, and how to reduce them.
Identifying overheads is important not only for budgetary purposes, but also for determining how much a company should charge for overheads on its new projects in order to make a profit.
Where do overheads come from?
Overhead costing: Construction companies determine the overhead costs of their projects by evaluating the following four items:
First, consider the salaries of all technical, administrative and maintenance staff (excluding construction projects)
Examples: This includes the indirect hours of the company’s engineering, budgeting, quality control, purchasing, sales, administration, accounting, finance, legal, cleaning, security, etc. departments.
The image shows a summary prepared by the author of typical general costs for construction and/or installation projects.
Expenditure on movable and immovable assets (excluding construction projects) is then added
Examples: This expenditure includes the purchase and depreciation of movable and immovable property, the maintenance of such property and the rental of buildings, etc.
Please also include office expenditure (excluding construction projects)
Examples: Expenses for purchasing supplies, travel, marketing, banking, telephone bills, electricity, gas, water, internet, postage, etc.
Finally, taxes, insurance and financial costs (excluding construction projects) are included.
- Taxes: This includes taxes payable even without employment.
- Insurance, Examples: Include property insurance, proposal maintenance coverage, car insurance for members and shareholders, etc.
- Financial costs, Examples: Financial expenses refer to the costs incurred by a company for utilizing capital provided by third parties.
What is the best way to estimate overheads in a small construction company?
Firstly, we can use the four elements above to produce a comprehensive list of our overheads over a given period.
The result gives us the historical overheads of the construction company.
How can overheads be allocated to a new project?
Depending on the type of work carried out by the contractor, it 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 percentage of the direct costs incurred for each project.
What is the percentage of overheads for a construction company over a given period?
To calculate overhead percentage, divide total overhead by total sales for the period and multiply by 100.
The overhead cost formula is:
This percentage represents the amount used by the estimator to allocate 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 percentage of overheads can vary significantly between different contractors and projects and it is essential that contractors carefully analyse and manage their overheads to ensure profitability and competitiveness.
How to reduce overheads? / How to calculate overheads on construction projects.
Reducing overhead costs is a critical aspect for contractors to remain competitive and increase profit margins.
Here are some specific ways to achieve this in the construction industry.
First, use common sense.
Reduce overheads. By using common sense, we can achieve an optimal level of total spend.
The reduction of overheads to what is strictly necessary is a crucial step in the maintenance of the company’s financial health.
Rent Your Office Space
At the start 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 with high overhead costs and implement strategies for improvement.
Be realistic in your bidding process to avoid underestimating costs and facing financial strain during the project.
Reduce overhead by utilizing construction management software and digital tools to streamline processes, minimize paperwork, and improve communication.
Monitor labor productivity and identify areas where improvements can be made to complete tasks more efficiently.
Ensure that your personnel are well-trained and skilled to minimize errors, rework, and accidents. Well-trained employees are more efficient in their work.
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 action 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 in order to present a more competitive offer.
This occurs when the depreciation cost of heavy machinery used in construction is reduced or lowered, for instance.
.Overhead costing in construction projects / Calculate man hours