Overheads and Indirect Costs in Construction Businesses

Going from self employed builder to owning a construction company brings with it a whole host of added responsibilities. Understanding costs and overheads is one really key thing in any business. We dsicuss that specifically for construction businesses.

If you’ve enjoyed creating a successful career in construction, then a business is not the first thing you’ve built! But taking the leap from a builder working on someone else’s projects to creating your own construction company requires new learning and skills.

Today, we’re talking about building a business in construction (no pun intended) specifically in relation to indirect costs and overheads. In other words, how much is it going to cost to establish your business? Wha will it cost to run it? Understanding those figures is vital to working out what profitable means for you. So let’s dive right in.

Overheads vs Indirect Costs

Business costs can be split into overheads and indirect costs. Overheads are the costs that you’ll need to pay to ensure that your business can run. In other words, these are the essential expenses that, without, you’d have no business.

Indirect costs, on the other hand, are those expenses that are not essential, but still have an effect on your business.

Construction business costs

Like any other business, construction companies face both overheads and indirect costs which can be broken down to include the following:

Overheads

  • Rent and business rates: one of the biggest costs for a construction firm is rent and business rates. Most medium and large construction businesses operate out of some form of premises, so this is an important factor to take into consideration when it comes to budgeting. Many construction companies require space if they’re storing material on site and so large premises are often needed.
  • Bills and utilities: The ever rising costs of electricity, gas and water are, unfortunately, essential. And given how little control we have over rising bills, predicting and planning for these bills is really important.
  • Equipment: this can be a major cost for building companies as you’ll need to take into consideration materials, supplies and machinery. You’ll also need to think about any maintenance costs on machinery. Maintenance isn’t only essential to ensure your equipment continues to run, but is often also tied in with your responsibilities around health and safety
  • Staff salaries: if you’re planning on employing workers you’ll need to budget for their salaries.

Indirect costs

  • Insurance: most construction businesses have some form of builders’ insurance which can offer cover for a range of unforeseen events.
  • Training: as a construction company, you’ll want to have robust health and safety training in place to ensure workers know the potential hazards and risk management.
  • Marketing: you’ll want to set aside some of your budget for advertising and marketing to ensure that you reach your intended clients.
  • Accounting: you might be confident enough to take on your own accounts but many construction businesses employ an accountant to run their books.
  • Travel costs: these include getting to your premises, travelling to projects and picking up materials and supplies.

Why you should know the difference

It’s important to understand the differences between overheads and indirect costs and not just for tax reasons.

You’ll be able to manage your budget to a greater degree, allocate funds according to priority and price jobs competitively. This, in turn, will allow you to offer an enhanced quality of service and product.

Keeping track of your expenses in this way will also allow you to forecast more accurately, leading to growth and increased business success.

Good luck!

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