Running a business isn’t as simple as estimating various projects. You will also have to factor in running overhead costs that will affect your profits. Calculating overhead is essential for maintaining the health of your business. You can’t afford to forget about your expenses when setting prices and estimating the scope of work for various customers.
There are several key considerations for calculating overhead and profit in construction. Use this guide to learn more about your overhead expenses and how to factor them into your work.
What Is Overhead in Construction?
Overhead costs are the expenses and fees that come with running a business. For example, the rent you pay for your office building isn’t tied to a specific project. It is a fixed monthly expense that you have to account for when estimating your profits.
When it comes to operating costs for construction companies, overhead can include your equipment, fleet vehicles, and other tools that your staff bring from on just site to the next. Additionally, digital investments, like software tools for blueprints, are covered in overhead. Overhead estimates even have sub-categories. Your staffing costs include the salaries of your team, their benefits, healthcare, and the office supplies they use throughout the year.
How To Calculate Overhead Costs in Construction
There are basic and detailed ways to calculate your overhead costs. The simplest way is to add up all of your non-project-related expenses from last year and divide them by 12. This gives you a monthly estimate of your overhead. However, you can also take a more in-depth approach if you want to improve your overhead forecasting.
Add Up Your Fixed Monthly Expenses
Your fixed monthly expenses don’t change throughout the year. Most businesses have a variety of fixed costs and fluctuating expenses to keep their operations running. Here are a few potential fixed expenses:
- Your office rent or mortgage payment;
- Your monthly insurance premiums;
- Software costs;
- Retainers for accountants, bookkeepers, and marketing firms;
- Monthly payments on equipment;
- Monthly internet bills.
While these costs can change over time, like a landlord raising your rent, they are considered stable and easy to factor into your overhead calculations.
Most companies also have a mixture of hard and soft costs related to their operations. Soft costs are intangible and include expenses like administrative fees and insurance costs.
Calculate Indirect Costs
Every construction project has direct and indirect costs. The direct costs are tied specifically to a project: if you are putting tile on a roof, the tiles you buy are direct costs. Indirect costs are related to running your business — not specific projects. Using the same roof example, the indirect costs would include the ladders and scaffolding you bring to the site, along with the fleet truck that transports your team.
After you look at your fixed costs, explore any variable indirect costs that go with them. For example, electricity is a variable cost. You will use more air conditioning in your office during the hot summer months, which drives up your expenses. However, running a business without air conditioning is difficult and uncomfortable for your staff.
Go through your expenses and assign each cost as direct or indirect, along with fixed or variable. This can help you accurately forecast your overhead.
Combine Fixed Expenses With Indirect Costs
Contractors can determine their total overhead by combining the values of indirect costs and fixed expenses. Simply put, if you cannot associate an expense with a specific project — and that project alone — then it is part of your overhead.
Calculating overhead can give contractors a better understanding of their spending patterns. You can identify sources of wasted spending if you need to cut back or better calculate which months are more profitable than others. This whole process should increase the transparency of your finances.
How To Calculate Profit in Construction
Once you have a better understanding of your overhead you can track your total profits. Revenue and profit are different concepts. The revenue is the amount of money you bring into your business, the profit is the amount left over after you subtract all of your expenses, including overhead. Follow these steps to track the profits of your operations:
- Start with your total revenue. You can base this on your income from a specific project or revenue from a certain period — like a month or quarter.
- Add up your direct costs. These are all of the expenses required to complete a project.
- Calculate your overhead. Pull together every expense that isn’t directly tied to specific projects.
- Subtract your direct costs and overhead from your revenue. This is your profit.
This process isn’t easy with companies that run complicated construction operations. A single project can take several months, if not years, to complete. This is why you might need to take a wider timeframe to make sure your business is profitable. For example, you can look at your revenue for the year to get a big-picture view of your business. As you get better at tracking costs and profits, you can use a narrower scope to manage your business’ finances.
Using Construction Overhead and Profit Calculations To Plan Future Projects
Your goal as a business owner is to make sure each project is profitable, not just in a single instance, but for your business as a whole. If you understand your overhead, you can build better cost estimates to make sure your business grows. This might involve increasing your labor costs to reach profitability or building equipment and overhead fees into each project based on the size of the job.
Another way to improve your financial transparency is with better takeoff software. Modern construction takeoff tools are AI-powered and track the materials required and estimate the costs associated with the work you take on. Better estimates mean you won’t overcharge your clients or have to take on unexpected costs related to the job. These tools are also essential for contractors who can recreate projects instead of building new estimates from scratch.
When your clients know that your estimates are accurate, they can feel like they are paying a fair fee. On your end, you can feel confident that your prices will fully cover the project and support the overhead you need to account for. Take control of your finances and make sure your company is profitable, no matter your operating costs.
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