How to Calculate Implicit Costs

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The overhead on construction projects can run into the millions of dollars.
The overhead on construction projects can run into the millions of dollars. (Image: Jupiterimages/Photos.com/Getty Images)

Part of the budget for any proposal should consist of indirect, or implicit, costs often referred to as "overhead." If you fail to include overhead in your costs, you will overshoot your budget by as much as 30 percent, depending on the project. Such an overrun on a multimillion-dollar construction project can spell disaster for the organization paying for the construction. Overhead includes any costs you cannot bill directly to the project, such as electricity, supplies from the organization or administrative assistance.

Add up the total expenses of the project that are directly billable.

Estimate the expenses for the overhead costs, such as administrative help or other employee costs, insurance, travel, taxes, legal fees, telephone and fax charges, rentals, repair, accounting, supplies, utilities and advertising. You may find many of these expenses difficult to calculate, but make a rough estimate.

Figure 20 percent of the total direct billable costs. Compare that sum with the estimate for the overhead or implicit costs. Include the greater number in your budget for overhead. For example, if your calculation for the implicit costs is less than 20 percent of the total of the directly billable costs, use the 20 percent figure instead. You can always return any unused funds, but you'll find this amount much more difficult to make up for a cost overrun.

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