As a construction company leader, you’re aware of the intricacies involved in managing construction finances. From budgeting and forecasting to bidding projects, your expertise plays a pivotal role in project success and your company’s financial success.

One area that often confuses clients is overhead because there is judgement involved. To help clear up any confusion, let’s define general overhead, explore its significance, and provide strategies to help with effective management.

What Is Overhead?

In straightforward terms, overhead (or indirect cost) refers to ongoing expenses incurred by a construction company that are not directly tied to a specific project. Examples of these costs include depreciation, project manager wages, unallocated fuel insurance, and equipment maintenance.

Significance of Overhead

While not project-specific, indirect costs are essential and ignoring them can lead to financial challenges that jeopardize project success. Underestimating indirect costs during the bidding process often results in contract losses, while overestimating indirect costs may risk your bid not being approved.

If the indirect cost does not relate to the construction activity, it should not be considered in the overhead pool. For example, the salary of a receptionist or administrative vice president should not be included in your overhead estimates.

If the indirect cost is incurred solely to benefit the construction activity, all of that cost should be included in the overhead pool. For example, small tools and repairs to equipment will normally meet that criterion.

If a portion of the cost relates directly to the construction activity, consider only that portion in the overhead allocation. Gasoline, for example, may be used in construction equipment and in the administrative vice president’s car. Only the construction equipment portion, or the percentage that relates to the construction activity, should be included in the overhead pool.

Strategies for Effective Management

Accurate Cost Estimation: Incorporating overhead ensures all indirect job cost expenses are accounted for, providing a true project cost. This gives your contractors the ability to bid projects competitively while maintaining profitability.

Risk Mitigation: Factoring in overhead will protect your company against unexpected expenses and market fluctuations. This will ensure project viability even in challenging circumstances.

Business Growth: Allocating overhead to projects allows reinvestment in the company, such as employee retention and upgrading equipment.

If you would like help with calculating or understanding your company’s overhead, the construction experts at KT are here to help!