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 is so different about overhead versus the actual cost of construction or the hard cost as we refer to it. So 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 is related project expenses allocated to the construction of the project excluding job costs.
This would include but not limited to office rent or mortgage, office based staff salaries, insurance, tools, equipment, accounting, legal expenses. In other words, this is the cost to the company to actually run that project from the main office. Even though you have project managers, you might have superintendents on site, what have you, the overall cost of running the business with or without that particular project taking place has a monthly expense.
So that's part of your actual overhead. So typically the overhead is established by the corporation or by the company itself to understand what it costs to be in business per month to keep the lights on. That's a term that we often use in construction.
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 still must operate, it has a staff that operates everything and those are your monthly costs. So those costs are then provided typically by your company.
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They're already pre-estimated in advance and you apply them to a monthly cost itself. So check with management within your company to find out what the actual overhead costs are for the company.
