Construction companies must provide enough leeway in their contracts to cover overhead business expenses. These expenses are harder to calculate and pro-rate to different customers when compared to the direct costs of materials and labor to complete a construction project. In general, there are three types of overhead expenses: direct, indirect and fixed. Managing these expenses and accounting for them in the bidding process is crucial for a construction company to turn a profit.
Direct Overhead Expense
Construction job sites will have several direct overhead expenses. These include temporary offices, equipment rental, administrative salaries and utilities for the job site. These overhead expenses are a necessary expenditure to complete construction at the job site. Job sites need power and water to complete the construction. These costs are passed on to the customer and should be budgeted during the bidding process.
Indirect Overhead Expense
Indirect overhead expenses include items such as utilities, insurance, employment taxes and retirement plans. The construction company must pay these items on a regular basis, whether or not the company is actually constructing something. When calculating a bid, the estimate must include enough money to cover these expenses for the company to be profitable. Rent, communications, and equipment used for more than one job also fall under the heading of indirect overhead expenses.
Fixed Business Overhead Expenses
Fixed business overhead expenses include payroll taxes, unemployment insurance, bid bonds, and licensing. The amounts may change due to fluctuations in the number of bids and the amount of labor during a project, but must be accounted for when preparing bids and estimates for customers.