Overhead expenses must be taken into account when keeping the books for a business as well as when estimating profit.
Overhead are cost items that cannot readily be charged to any one project, but represent the cost of operating a construction company. They are incurred regardless of any specific project. There are two types of overhead items, Overhead Expense Items and Job Overhead Items.
Some of the overhead costs of operating a business are one-time expenses that do not recur, or only recur once annually. Other expenses are incurred monthly. Regardless of how frequently the individual overhead items occur, they must be accounted for at monthly, semi-annual, and annual levels.
A computer monitor in the main office of a construction company breaks in February, and must be replaced. The replacement cost $289.50.
January | February | March | April | May | June | 6 Month Total | Monthly Average | Yearly Estimate | |
Computers | $0 | $289.50 | $0 | $0 | $0 | $0 | $289.50 | $48.25 | $579.00 |
Examples of recurring overhead costs include wages and salaries, health insurance, and vehicle costs.
Officer salaries of a construction company total $16,425.00 monthly.
January | February | March | April | May | June | 6 Month Total | Monthly Average | Yearly Estimate | |
Officer Salaries | $16,425.00 | $16,425.00 | $16,425.00 | $16,425.00 | $16,425.00 | $16,425.00 | $98,550.00 | $16,425.00 | $197,000.00 |
As a construction company schedules and plans their projects in advance, they hopefully have a rough idea of what their estimated yearly income from all of their projects will be. This figure is the Estimated Yearly Gross Income
A construction company has estimated the following values for their yearly overhead.
Estimated Yearly Gross Income | $2,586,000.00 |
Estimated Yearly Gross Overhead | $465,385.73 |
Estimated Yearly Gross Wages | $356,891.19 |
Overhead as a Percentage of Income | 18% |
Overhead as a Percentage of Income would be calculated as follows:
465,385.73 ÷ 2,586,000 = 0.17996
In this example, Overhead as a Percentage of Income is 18%
Construction firms must account for their administrative costs of doing business. Because their business is construction, it is appropriate to add in an overhead charge to line items in the estimate that require the use of company overhead resources.
The following considerations should be taken into account when choosing which items to add the overhead up-charge to. Note that there is no clear answer to any of these questions, and that some of the choices on line item overhead will vary from project to project in order to win bids over competitors.
Profit is the balance of money paid to the construction company after all other expenses are paid. The amount of profit is variable depending upon factors, including:
In general, for residential projects in decent market conditions and stable demand, 10% profit is a good starting number to use in estimating your final figures on a project estimate.
Construction is a business in which you are supposed to make a fair, reasonable profit.
Frank Degostino
Construction firms may choose to add a profit percentage to every line item in every phase of construction. Some may choose to offer certain materials or services at cost (ie. no profit) in order to make their estimate and resulting bid for the project more competitive.
The following considerations should be taken into account when choosing which items to add the profit up-charge to. Note that there is no clear answer to any of these questions, and that some of the choices on line item profit will vary from project to project in order to win bids over competitiors.
Sales tax rate is determined by the local and state governments where the project is being completed. It is a cost that must be accounted for, and whether it is covered by the client or the construction company is a decision that must be made when completing a project estimate.
Sales tax must be paid. It is the law.
Remember, sales tax must be accounted for and paid by someone. If it is not included in line items as outlined above, the client will not pay them. In this scenario the construction company will pay sales tax, which will cut into profit.
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