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Direct cost is comparatively easier to track and manage when it comes to construction accounting. However, it’s an indirect cost or overhead that’s highly challenging to be managed. And if this cost is not controlled/managed, it can lead to impaired financial reporting and decision making.

In this article, we endeavor to understand the most common types of indirect costs/overheads that need to be managed for better financial performance while constructing.

What is construction overhead?

Construction overheads are the indirect costs that can’t be linked with any specific construction project. These costs are related to support services/activities that consume resources and need to be allocated/apportioned to the projects under construction.

Examples of construction overheads include but are not limited to equipment depreciation, accounting/bookkeeping, permits, licenses, software subscriptions, rent, utility bills, and insurance costs, etc.

There is a need to keep eyes on these expenses and ensure things are timely controlled. Let’s go through times and tested strategies to control the construction overheads.

How to control construction overheads?

Being bookkeeper for general contractor, I understand you may have multiple projects under construction at a time, and it may be challenging to correctly allocate and control overheads. Let’s go through strategies to control the overheads.

1. Keep ongoing audit trail – It’s good idea to ensure each overhead is backed by genuine need, authorization, and appropriate approval.
2. Correctly allocate the overheads– It’s important to ensure overheads are appropriately allocated to each construction project. This practice not only helps ensure accurate project profitability but overheads can be compared with the relevant project revenue helping to reach rational decision-making related to business profitability.
3. Make a budget– Formulate rational and logical overhead budget for each project under consideration. A good idea is to maintain itemized budget for each line specifically.
4. Analyze buy or rental cost– For controlling the equipment cost, go through cost of rental and depreciation. If cost of equipment (cost of owning the equipment like depreciation & equipment financing) is higher than rent, opt for the rent and vice versa.
5. Consider outsourcing– Consider outsourcing the administrative and support services like bookkeeping/accounting. It can be a helpful idea for not only controlling the cost but also handing over the accounting to competent hands and focusing on construction rather than numbers.

Conclusion

Construction overhead is an indirect cost that can not be linked with the specific construction project. This cost needs to be allocated depending on the activity consumed by each project. For instance, equipment depreciation/rent should be allocated depending on the equipment usage in the projects.

Construction overhead needs to be pro-actively managed or it might lead to impaired financial reporting.

To effectively control the construction overheads, there is a need to keep ongoing audit trail, correctly allocate the overheads, make a budget, analyze buy or rent cost for the equipment, and consider outsourcing of the administrative work.

If you are looking for any assistance in terms of construction bookkeeping and accounting, let’s get connected!