Content provided by the accounting firm of Dorfmann-Robbie specializing in construction accounting.
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
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
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
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
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
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.