Understanding the difference between overhead costs and hard costs can significantly influence the profitability of your construction project. This article unpacks the concept of overhead, its components, and how it affects the total cost of managing a project.
Key Insights
- Overhead costs are related to project expenses that are associated with running the project from the main office. These expenses, which are separate from job costs, include office rent, staff salaries, insurance, equipment costs, and legal expenses.
- Overhead costs are typically established by the company to understand what it costs to remain in business per month. These costs are necessary for keeping the office operational, regardless of whether a project is ongoing or not.
- Overhead costs are usually pre-estimated and applied on a monthly basis. It's essential to check with company management to understand the actual overhead costs for accurate financial planning and project budgeting.
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So let's talk about overhead and what makes it different from the actual cost of construction, or the hard cost as we refer to it. Before you start adding any additional markups or add-ons to your project, make sure that you've fully established your total hard costs for the project. Overhead refers to related project expenses allocated to the construction of the project, excluding job costs.
This would include, but is not limited to, office rent or mortgage; office-based staff salaries; insurance; tools and equipment; accounting; and legal expenses. In other words, this is the cost to the company to actually run the project from the main office. Even though you have project managers and possibly superintendents on site, the overall cost of running the business—with or without that particular project taking place—incurs monthly expenses.
This is part of your actual overhead. Typically, overhead is established by the company to understand the monthly cost of staying in business—what we often refer to in construction as “keeping the lights on.”
You want to keep the lights on; you want to keep the office running whether you get a project or not, whether your estimate turns into a project or not. The company must still operate, it has a staff who manages everything, and those represent your monthly overhead. These costs are typically provided by your company.
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They are usually pre-estimated in advance and applied to the monthly cost. So check with management within your company to find out what the actual overhead costs are.
