Overhead costs in construction

Overhead costs are correlated to the financial health of your business. Their management is an important lever for improving the profitability of construction sites. This article details their composition and suggests strategies to optimize them.

Definition of overheads

Overheads are the financial background on which any construction business is based. Their role is fundamental in The cost structure and the pricing strategy.

Definition

Overhead costs include expenses necessary for the proper functioning of a business. For example, they include office rent, employee salaries not directly related to the work, insurance, or even travel expenses. These costs are distinguished from direct expenses related to construction sites, such as the purchase of materials, the payment of workers, or the rental of equipment.

Overhead costs are essential for establishing the estimated budget. They influence the calculation of the selling price. Their good management helps the profitability of the company, but it must be done without compromising competitiveness in the market.

There are 2 types of fillers

Overheads fall into two categories: fixed expenses and Variable loads.

• Fixed expenses, also called structural expenses, cover the fundamental costs of the company. They are independent of the volume of activity or turnover.

Rent is an example of a fixed charge. Its amount does not change, except for a revision linked to a clause. Hence the importance of review overheads periodically to adjust sales prices.

• Variable expenses, or operating expenses, fluctuate according to the company's activity. Travel expenses are a good example of this category. They change according to the number of construction sites and their remoteness.

Overhead costs applied to the construction sector

Overheads vary in principle. According to the corps d'État of the company. Each building profession, with its specificities, must manage specific expenses compared to other sectors of activity.

For example, an electrician requires a large stock of equipment and tools for his installations. For their part, a mason will need space to store building materials such as cement and bricks.

Main costs in construction

• Rent and rental charges: These costs concern businesses that have a workspace such as an office or a workshop. This also includes the rental of professional vehicles or construction equipment.
• Water, gas, and electricity: these expenses fluctuate according to the size of the premises, the number of employees and the use of the equipment.
• Travel expenses: they generally concern workers who go to construction sites. They include fuel, tolls.
• Administrative salaries: only the salaries of non-productive personnel on construction sites are counted as overheads.
• External service providers: fees for experts such as accountants, lawyers, or consulting firms fall into this category.
• Taxes and taxes: Of course, you have to count social security contributions, VAT, and corporate tax.

Ancillary costs

• Professional insurance: some are mandatory in the construction industry, for example with professional liability insurance or decennial insurance.
• Maintenance and supplies: This includes work equipment, office supplies, and small tools.
• Waste management: This item covers waste disposal and material recycling expenses not related to a single operation.
• Work clothes: specialized outfits are considered to be overheads. These can be shoes, safety vests, or even jackets and pants.
• Computer software: digital tools have become essential for studies, billing, accounting, or even construction site monitoring.
• Postal and telecommunication costs: they include the costs of sending mail and internet and telephone subscriptions.
• Advertising and marketing: The digitalization has redealt the cards. These costs include fixed costs, such as creating the visual identity, and variable costs, such as buying leads on Google.
• Bank fees: they are associated with the professional account which is mandatory for any business.

How do you calculate the general expenses of a business?

The support of a chartered accountant is recommended for accurately evaluating your business's overheads. It can identify and total all of your expenses, based on the previous fiscal year.

The amount of overheads can be expressed in the form of coefficient or of percentage. It is associated with Dry payout to calculate the cost of a project, then its sales price excluding taxes. As a reminder, the dry outlay makes it possible to determine the direct costs of a site, with labor, materials and materials.

Here are the main formulas to remember:

• Total disbursement = Dry disbursement + Construction costs.
• Cost price = Total disbursement + General expenses (or Structure costs).
• Sales price excluding taxes = Cost of production + gross margin.

Cost price calculation

To calculate the cost price of a service, multiply the dry cost of the work by your overhead coefficient. Take the example of an electrical installation with a dry outlay of €2,000 excluding VAT and an overhead coefficient of 1.2, the cost price would be €2400 (2,000 x 1.2).

Margin calculation

Also determine a coefficient for profits and hazards, representing your margin. This margin, often a percentage, must cover the unexpected while remaining competitive. The average margin generally varies between 10% and 20%.

Calculation of the sales price excluding VAT

After determining the cost price and the margin, you can calculate the sales price excluding VAT. If we go back to the example of the electrical installation with a cost price of €2,400 and a margin of 15% (coefficient 1.15), this gives: 2,400 x 1.15 = a sales price of €2,760 excluding VAT.

Why do you need to know your overheads?

An accurate assessment of overheads is essential, as they are the base of your price and profitability strategy. As indicated above, they cover operating costs that are not directly related to your construction sites.

The coefficient of overheads

The overhead factor is an essential element of the selling price. It gives you a clear vision of the proportion of these costs in the total cost of your projects. The indicator allows you to adjust your rates and be profitable on each construction site.

Use overheads in calculating the selling price

Incorporate overheads into the Costing of the construction site is a non-negotiable step to ensure that all your costs are covered. This allows you to generate a healthy profit margin, which is essential to the sustainability of your business.

A few tips to optimize your overheads:

• Regular reassessment: Review your overheads frequently to identify areas of cost that can be reduced. For example, this may concern the renegotiation of your rental or service contracts or the optimization of your energy consumption.
• Technology and automation: invest in software for construction site management to automate administrative tasks. This reduces the time spent on non-productive tasks and can decrease your staff needs.
• Continuing education: train your teams in the optimal use of resources. A well-trained workforce is more efficient and contributes to the reduction of direct and indirect costs.
• Supplier management: establish solid relationships with your suppliers to benefit from better prices, favorable payment terms or volume discounts. This can impact your margins.
• Follow-up and analysis: Use financial tracking tools to analyze your expenses in detail. They are important for detecting the financial flows of your business and identifying savings opportunities.

Optimizing each expense item can result in considerable overall savings. Do you want to discover the effect that site monitoring software like Alobees can have on your management? Try it free for 14 days and notice the difference!