Published on July 6, 2021
Many contractors focus on estimating accurate costs for each job, which is the first step to run successful construction companies. In order to bid as well as to achieve a profit margin target successfully, you need know if the cost estimates for your bids include sufficient profit margin including your field and office overhead costs? Determining the overhead costs of your construction business, as well as the profit margin required to support those costs, is a crucial step in providing any job estimate. It’s important to know precisely what these numbers are, what they mean for your business, and how to leverage them to your advantage. Hazy math won’t do, especially when competing companies are often operating on razor-thin margins, or in some cases no margin at all.
So how do you find out how much to charge, while still remaining a sustainable operation? That’s exactly what we will discuss in this blog.
Overhead costs refer to the everyday operating expenses of your operations. Things like electricity, construction equipment, project manager payroll, office rent, and supply expenses. These are necessary operational expenses but are not directly associated with specific projects or allocation method may be more cost effective than charging off each expense to specific jobs.
To establish your overhead rate, it is imperative to maintain historical indirect/overhead costs for each reporting period. Also, you need to understand causes of potential fluctuations for each reporting period such as lower volume of certain type of jobs, increasing compensation and benefit costs, or any additional lease expenses.. An appropriate overhead rate will depend on the region and local competition of a particular job you are bidding for, your organization should assess and carefully determine overhead rate.
It’s critical that you monitor your costs closely instead of relying on a one-time snapshot of your expenses. The construction industry is dynamic and fluid and subtle changes can occur over time. Double checking everything will ensure you catch any costly errors.
Profit is the other thing to consider when figuring out your mark up. Your profit is what’s left over after covering both the indirect costs , as well as the “hard” costs associated with labor and materials for a particular job.
Increased business momentum usually means an increase in revenue and growth. While this is positive and exciting in your business, it’s easy to fall behind in bookkeeping and analyzing financial results when things are expanding. Expenses can be an afterthought during times of increased revenue and growth which can cause some expenses to go unaccounted for. The financial health of your business depends on solid accounting for all expenses.
There is plenty of bookkeeping software that can help you keep track of expenses, but the software still requires a person to input the data and keep up with it. For many construction companies, that person is the business owner. As a business owner, your time is a precious and limited resource. An accounting partner can be vital to the health of your business. Especially if you don’t have the time to devote to meticulous bookkeeping and financial analysis amidst the rest of your managerial tasks and getting your hands dirty on the job site.
Outsourcing your critical accounting tasks is a good decision and one that will keep your expenses and income straight. Bringing in an outside professional can ensure this important process is handled quickly and accurately.
Allen Construction Group is a construction industry client advisory services firm offering CFO, accounting, and bookkeeping services. All of our management and staff have construction industry experience, making this industry our primary focus and specialty. Allow our reasonable rates to take the stress of accounting and bookkeeping off you and your business. We’ll make sure the job is done to the highest accounting standards. Contact us today to schedule a free introductory meeting to assess your accounting and bookkeeping needs.