Beam Balances: Understanding Overheads in Construction Bookkeeping
In the vast world of construction, balancing the tangible - the structures, roads, and edifices - with the intangible, primarily the financial intricacies, becomes an art and science in itself. Central to this balancing act is understanding overheads. Just as a beam ensures stability to a structure, precise bookkeeping of overheads ensures financial stability to a construction company. In this guide, we'll delve deep into the world of overheads within the framework of construction bookkeeping.
1. Overheads Defined: More Than Just an Afterthought
Overheads, often considered secondary to direct costs, are vital. These are the ongoing expenses not directly tied to a specific project but essential for a construction company's operations. Examples include:
Office Expenses: Rent, utilities, and office supplies. While they don’t tie to a specific project, they’re indispensable for seamless operations.
Salaries: Not all employees work on-site. Salaries for administrative staff, management, and others who aren’t directly billable to a specific job fall under overheads.
Equipment Maintenance: Machines require regular upkeep. The costs for such maintenance, when not allocated to a specific job, become a part of the overhead.
2. The Contractor’s Perspective: A Closer Look
The nature and amount of overheads can vary depending on the type of contractor:
General Contractors: Given their broader role, they often have sizable overheads spanning office spaces, larger administrative staff, multiple equipment types, and expansive storage facilities.
Subcontractors: Specializing in areas like plumbing, electrical, or masonry, subcontractors might find their overheads leaning more towards specialized equipment maintenance, licensing, or specialized training programs.
Home Builders: Their overheads often encompass model homes, sales teams, design center operations, and large-scale land development costs.
3. Allocating Overheads: The Nuanced Approach
Allocating overheads accurately to projects is vital for a realistic assessment of profitability. Different methods exist:
Percentage of Direct Labor: Here, overheads are allocated based on direct labor costs. If overheads are 50% of direct labor, and a project incurs $10,000 in labor, $5,000 would be added as overhead.
Percentage of Total Cost: This method calculates overheads as a percentage of the total project cost (excluding overhead). It's especially relevant when labor isn't the dominant project cost.
Square Footage or Unit Measure: Useful when projects are similar, this allocates overheads based on units, be it square footage for buildings or kilometers for roads.
4. Overhead Rate: The Guiding Star
The overhead rate, which is overheads divided by direct costs, is a crucial metric. A high overhead rate might hint at inefficiencies, while a low rate could suggest underinvestment in essential services. Benchmarking against industry standards helps in gauging where the company stands.
In Conclusion:
The construction industry, with its myriad complexities, requires a keen understanding of overheads to ensure projects remain profitable and companies thrive. It’s not just about pouring concrete or laying bricks; it’s about understanding the financial beams that balance the structure of success.
Navigating overheads can be intricate, but it doesn't have to be overwhelming. At Ledger Management, we combine deep industry insight with expert bookkeeping knowledge to help contracting companies balance their financial beams. Whether it's streamlining bookkeeping processes or enhancing cash flow through CFO services, we're here to assist in building your financial success.