Business News and Notes
Content provided by the accounting firm of Dorfmann-Robbie specializing in construction accounting.

Don’t lose sight of indirect job costs

Contractors who fail to properly allocate indirect job costs to their projects are missing out on opportunities to recoup expenses and submit accurate bids. Let’s take a closer look at how to define, track and recover these items.

Defining the term
The definition of indirect costs varies by company. For instance, contractors typically don’t put heavy equipment in this category, but most do include:

Project management, purchasing, contract administration and safety oversight salaries,

Small tool, fuel and supply, and freight charges,

Appraisal, consulting, accounting and legal fees,

Taxes, title transfers, permits, bonds and job insurance, and

Shop and marketing costs.

An estimate that neglects relevant indirect costs is incomplete and could lead to cost overruns. And bidding for jobs based only on direct costs can win contracts that may ultimately lose money.

Tracking the right data
Clearly, you need to set up a system for tracking indirect costs accurately and efficiently — not only for accounting purposes, but also to supply project managers with useful information for future bids. A good first step: Buy some construction-specific accounting software. It can help capture and report the right data and serve as a forecasting tool for future costs.

Then again, these applications are only as good as the
person who enters and updates the data. To ensure you’re accurately recording indirect costs, have your accounting department thoroughly review the indirect cost pool with your project managers.

It’s also a good idea to meet regularly with your estimators, project managers and accounting personnel to stay apprised of indirect cost definitions and reporting methods. Consistency is of paramount importance when preparing
an estimate.

Recovering these amounts
You must include indirect costs related to specific contracts as part of those jobs’ expenses. Thus, to properly recover these amounts, you must stick to a systematic and rational allocation method.

There’s no one correct approach. So review your allocation methods annually to ensure they’re in line with your management objectives and the current bid market. Experience helps, too. The longer your company has been in business, the more history it has to draw from in determining an accurate method.

In addition, within your ranks, actively promote the importance of recovering indirect costs — from estimator to project manager to controller to you. You needn’t be an expert to succeed at this task, but you do need everyone’s cooperation and involvement.

Eliminating surprises
A proper indirect-cost allocation system allows you to improve comparisons between actual and estimated costs, to bill and collect for these amounts, and to compare gross margins and overhead percentages with industry benchmarks. When monitored regularly, the system will eliminate surprises and enable you to bid more realistically.

Although the measures we’ve discussed in this article are certainly advantageous, they’re no substitute for expert advice. Please call us for help managing your indirect costs.


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Last Updated: [ October 7, 2008 ]