Overhead
Content
overhead
Definition
The ongoing administrative expenses of a business which cannot be attributed to
any specific business activity, but are still necessary for the business to function.
Examples include rent, utilities, and insurance.
What Are the Overhead Costs in Construction?
As a construction cost estimator, you probably know what makes up the direct costs of
every job. However, understanding the elements of construction overhead costs eludes
many and a lack of this knowledge can mean the difference between profit and loss. An
overhead pool collects costs that benefit multiple work activities or jobs. The
International Cost Engineering Council divides the term overhead into two portions,
field office overhead and home office overhead. Not fully understanding overhead
expenses can result in underbidding a job.
Home Office Overhead Costs
A construction company with more than one job typically uses a home office for managing
administration. Unless a
1-separate general and administrative pool exists,
2-facility costs for this office, such as rent and utilities, are overhead costs allocatable to all
jobs.
3-Subcontractor costs such as payroll services
4-outside legal or auditing services used by the home office also fall in the overhead pool.
Field Office Expenses
While the materials and labourers to perform work make up direct costs of a construction
job,
field offices and their associated operating expenses comprise the indirect costs.
1-Temporary facilities and administrative items dedicated solely to the specific job, such as
cell phones and fax machines on location, fall into this overhead category.
2- work vehicle expenses and equipment depreciation,
3-worker uniforms and employee welfare items such as water coolers or free coffee.
Indirect Salaries
When a manager controls multiple jobs, you may track his salary as a direct cost by
allocating his costs to both jobs. If managers control multiple jobs at one time, you may
decide to consider their cost as overhead. Regardless of the manner chosen, consistency is
critical. If field management salaries charge to overhead for one contract, the same should
apply to all similar situations. Indirect salaries of home office employees also contribute to
the overhead expense pool.
Taxes, Bonds and Insurance
Payroll taxes such as
1- income taxes,
2- unemployment taxes and
3- Medicare contributions
fall into the category of overhead expenses. These fixed overhead costs are incurred for
every hour of labor paid.
4-health insurance for employees, the amount should also be tracked in your overhead pool.
The company's general liability insurance cost,
5-cost paid to bond construction jobs and
6- the amounts paid to maintain workman's compensation insurance
7-pension plan for your employees, the amount needs to be tracked as an overhead expense.
Typical List of Overhead Expenses in a
Construction Business
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
1- temporary offices,
2-equipment rental,
3-administrative salaries and utilities for the job site.
These overhead expenses are a necessary expenditure to complete construction at the job
site.
4-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
1-utilities,
2- insurance,
3-employment taxes
4-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.
5-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
1-payroll taxes,
2-unemployment insurance,
3-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.
Markup is the difference between the cost of a good or service and its selling price.[1] A markup is
added on to the total cost incurred by the producer of a good or service in order to create aprofit
Fixed markup[edit]
Assume: Sale price is $2500, Product cost is $2000
Markup = Sale price − Cost
$500 = $2500 − $2000
Definition
The ongoing administrative expenses of a business which cannot be attributed to
any specific business activity, but are still necessary for the business to function.
Examples include rent, utilities, and insurance.
What Are the Overhead Costs in Construction?
As a construction cost estimator, you probably know what makes up the direct costs of
every job. However, understanding the elements of construction overhead costs eludes
many and a lack of this knowledge can mean the difference between profit and loss. An
overhead pool collects costs that benefit multiple work activities or jobs. The
International Cost Engineering Council divides the term overhead into two portions,
field office overhead and home office overhead. Not fully understanding overhead
expenses can result in underbidding a job.
Home Office Overhead Costs
A construction company with more than one job typically uses a home office for managing
administration. Unless a
1-separate general and administrative pool exists,
2-facility costs for this office, such as rent and utilities, are overhead costs allocatable to all
jobs.
3-Subcontractor costs such as payroll services
4-outside legal or auditing services used by the home office also fall in the overhead pool.
Field Office Expenses
While the materials and labourers to perform work make up direct costs of a construction
job,
field offices and their associated operating expenses comprise the indirect costs.
1-Temporary facilities and administrative items dedicated solely to the specific job, such as
cell phones and fax machines on location, fall into this overhead category.
2- work vehicle expenses and equipment depreciation,
3-worker uniforms and employee welfare items such as water coolers or free coffee.
Indirect Salaries
When a manager controls multiple jobs, you may track his salary as a direct cost by
allocating his costs to both jobs. If managers control multiple jobs at one time, you may
decide to consider their cost as overhead. Regardless of the manner chosen, consistency is
critical. If field management salaries charge to overhead for one contract, the same should
apply to all similar situations. Indirect salaries of home office employees also contribute to
the overhead expense pool.
Taxes, Bonds and Insurance
Payroll taxes such as
1- income taxes,
2- unemployment taxes and
3- Medicare contributions
fall into the category of overhead expenses. These fixed overhead costs are incurred for
every hour of labor paid.
4-health insurance for employees, the amount should also be tracked in your overhead pool.
The company's general liability insurance cost,
5-cost paid to bond construction jobs and
6- the amounts paid to maintain workman's compensation insurance
7-pension plan for your employees, the amount needs to be tracked as an overhead expense.
Typical List of Overhead Expenses in a
Construction Business
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
1- temporary offices,
2-equipment rental,
3-administrative salaries and utilities for the job site.
These overhead expenses are a necessary expenditure to complete construction at the job
site.
4-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
1-utilities,
2- insurance,
3-employment taxes
4-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.
5-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
1-payroll taxes,
2-unemployment insurance,
3-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.
Markup is the difference between the cost of a good or service and its selling price.[1] A markup is
added on to the total cost incurred by the producer of a good or service in order to create aprofit
Fixed markup[edit]
Assume: Sale price is $2500, Product cost is $2000
Markup = Sale price − Cost
$500 = $2500 − $2000
