Winning a bid is a wonderful thing. That is, unless, you win it and end up losing money in the process. A key factor in making a profit is having a good understanding of what your company’s overheads costs are.
An overhead cost is the amount of money needed to keep your business in operation even if you currently have no income. If your company does currently have work, any costs directly related to that project (such as materials, labor, and direct supervision) would not be considered overhead. Direct costs are simply those that would not be incurred if you had not worked on a specific project.
Items to Include in Overhead
- Office Staff and Upper Management Salaries and Benefits
- Insurance (not insurance required by a project)
- Equipment depreciation
- Attorney fees
- Accountant fees
- Paid employees that are not actively working on a project
- Any other fees, costs, or bills not specifically related to a project
How to Calculate Overhead Percentage
The keys to calculating Overhead Percentage is being able to determine the amount of indirect costs you incur following the list above and having an accurate history of the breakdown of costs on several different projects. To find your overhead percentage, divide your indirect costs by your direct costs:
For example, on a $100,000 project, you determine that your overhead is $35,000 and your project costs are $65,000, your overhead percentage is 53.8%. For future projects, you know that you need to multiply your direct costs by a factor of 1.538 to cover your overhead.
Lowering Your Overhead
Lowering your overhead equates to a higher profit margin, so we should all be striving to have the lowest overhead margin we possibly can. We suggest checking out Juan Rodriguez’s post on about.com, where he has shared his list of 9 different ways for a construction company can reduce overhead. The list includes:
- Managing your vehicle fleet,
- Reducing waste by going paperless and reusing supplies,
- Incentivizing employees to come up with cost saving initiatives
- Negotiating contracts with suppliers
- Investing in new technology that saves energy or improves efficiency
- Finding well-rounded employees
- Analyzing change orders
- Managing taxes and taking advantage of write-offs
- Paying employees well and keeping them happy
In order to run a successful business, you need to know everything about your business. Indirect costs may be difficult to truly quantify, but they can make or break your company’s profit margin.
How to Reduce Overhead Costs | About.com