LUTZ BUSINESS INSIGHTS

 

direct vs. indirect costs in the construction industry

Ryan cook, audit & consulting shareholder
clarke beller, Audit manager

 

A new project manager at your construction company is consistently seeing margins deteriorate at the end of their construction projects. The key question when confronting this situation is to determine if project management and accounting know and understand their costs. Knowing your costs can improve the bidding process and help you determine problem projects and employees.

Direct costs

Construction costs that are specifically allocable to construction contracts are typically referred to as direct costs. Common direct costs are often made up of materials, direct labor and subcontractor costs. There is little ambiguity with these costs, and they are typically easy to apply or assign to a specific construction contract.

indirect costs

In contrast, construction costs that are not specifically allocable to construction contracts are typically referred to as indirect costs. The three most common types of indirect costs include:

  • Overhead – Job site costs, home office costs and general conditions
    • Project Managers, Superintendents and other Support Staff
    • Office Trailers, Equipment and Supplies
    • Insurance, Office Salaries and other Miscellaneous Costs
  • Equipment – Owned equipment and small tools
    • Depreciation
    • Repairs and Maintenance
    • Taxes and Insurance
  • Labor Burden
    • FICA Taxes
    • Workers Compensation
    • Federal and State Unemployment
    • Vacation and other Fringe Benefits

common methods to allocate indirect costs

Below are a few examples of popular methods used to allocate indirect costs.

Allocate indirect costs based on direct labor:

Allocate indirect costs based on direct labor

Allocate indirect costs based on material costs:

Allocate indirect costs based on material costs

Allocate indirect equipment costs based on equipment hours:

Allocate indirect equipment costs based on equipment hours

common pitfalls while allocating indirect costs

However, when allocating indirect costs, be aware of the common mistakes people often make. A few of these common pitfalls include:

  • Not considering indirect costs in your bidding process.
  • Not allocating indirect costs on a timely basis (i.e. annually instead of monthly).

Maintaining timely records and being sure to include all costs during the entire project will help you avoid any potential errors.

Keeping track of your construction project costs can be tricky and time consuming. Being able to understand the difference between the two different types of costs will not only help you improve your margins but will give you a better estimate of your project spend. If you have any questions, or would like more information on this topic, please contact us today.

ABOUT THE AUTHOR

Ryan Cook

402.827.2085

rcook@lutz.us

LINKEDIN

RYAN COOK + AUDIT & CONSULTING SHAREHOLDER 

Ryan Cook is an Audit and Consulting Shareholder at Lutz with over 11 years of experience in accounting and assurance and five years in business valuation. He provides accounting, auditing, and consulting services to privately-held companies, with in-depth experience in the construction industry.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
EDUCATIONAL BACKGROUND
  • BSBA in Finance and Accounting, University of Nebraska, Lincoln, NE
COMMUNITY SERVICE
  • The University of Nebraska at Lincoln School of Accountancy, Advisory Board
  • Boys and Girls Club of Lincoln, Board Member
  • Habitat for Humanity's Annual Fundraiser (Brew Haha), Past Committee Member

402.778.7964

cbeller@lutz.us

CLARKE BELLER + AUDIT MANAGER

Clarke Beller is an Audit Manager at Lutz with over four years of experience. He focuses on providing auditing and consulting services to privately-held companies as well as for employee benefit plans.

AFFILIATIONS AND CREDENTIALS
  • Nebraska Society of Certified Public Accountants, Member
  • American Institute of Certified Public Accountants, Member
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, University of Nebraska, Lincoln, NE
  • MBA, University of Nebraska, Omaha, NE

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