The quick guide to calculating overhead costs in construction

Many small contractors and construction companies start out estimating pretty simply. When you’re a one-man show, you decide what you want to earn per hour, add material costs, add a markup, and you’re done. However, as your construction business grows, things get more complicated, and instead of simply calculating materials, labor, and profit, you’re going to want to include overhead costs in your estimates. Here’s what that means and how you can calculate it.

What Are Overhead Costs in Construction?

When you reach the point when you want to expand your construction business and you need to change the way you estimate your projects, you will need to split your direct labor costs from overhead costs. Direct labor costs in construction are any costs that are directly associated with getting the job done on your job site. That could include wages, vehicles, gas, equipment and tools, workmen’s compensation for your construction crews, etcetera. 

However, since you will probably have an office and possibly some staff at this stage, other costs are not directly associated with getting the job done on-site but still need to be factored into your overall costs. Those are known as overhead costs.

How to Calculate Your Overhead Costs in Construction

The best way to calculate your construction overhead costs is to pay attention to what you pay every month for things that aren’t directly involved in getting jobs done. That could include things like:

• Office and shop rental
• Storage yard rental
• Wages for administrative staff, salespeople, and other office-bound employees
• Utilities for your office
• Internet and telephone costs
• Stationary and office supplies
• Membership fees in associations or other organizations
• Legal fees
• Recruitment fees
• Advertising and marketing-related costs

And so on. Many things could be part of your overhead costs, but the most important thing to remember when deciding where an expense should be calculated is whether it’s directly involved in the on-site portion of the work. If it’s not, it’s probably an overhead cost.

Splitting Overhead Costs in Construction

Another important thing to remember about overhead costs is that they generally go down per crew hour on-site when adding more crews to your business. That’s because overhead costs don’t usually increase proportionately to the scale of your on-site capabilities. So, for instance, you’ll still be paying one bookkeeper, whether you have one crew or five crews, and you’ll still be renting one office while your ability to run multiple simultaneous projects increases.

You still need to keep track of your actual overhead costs, and some things will increase proportionately, but you can split whatever those costs are up among the crews you have working in the field.

Better Estimating Often Means Better Estimating Software

When you’re just starting out, spreadsheets, duplicate books, and handwritten calculations are probably fine for estimating quotes.

However, once you start needing to track overhead costs in construction, are running multiple work crews, and have office staff, it’s probably time to upgrade. If you’ve reached a turning point in your construction business, we’d love to show you how Bolster can help. Contact our team to book a free demo and find out why we’re the leader in construction estimating software innovation.