Accurately distinguishing between direct and indirect construction costs can improve the bidding process and help to identify and eliminate a host of business problems for insurers and restoration companies alike.
Currently, the industry has relied on a legacy overhead and profit allowance called the 10&10 rule of thumb. The practice is that once an estimate subtotal is reached, 10% is added as an overhead factor and another 10% for profit which gives you the grand total estimate amount. This rule has its roots in residential construction from long ago.
This industry standard is not always applicable as overhead is always different in all companies. Mitigation companies in particular often factor in more overhead due to equipment, mobilization and on-call labor; whereas construction companies that know this legacy standard is in play often will adjust their line item costs accordingly to make up for any shortfall on margins and will put 10&10 on their estimates for presentation purposes. If you do the math, 10&10 is actually 16.67% gross margin. The reality is that most mitigation and restoration companies exceed this amount in just their overhead costs alone when working on the average size loss and becomes compounded during a CAT situation. However, scales of economy should and do apply naturally as the project sizes increase due to competition.
Indirect costs are also necessary to identify and separate. Recognizing and accurately classifying both types of costs early in the process can ensure the estimate is accurate.
Costs that are directly billed to a single project are typically referred to as direct costs. Typical direct costs include materials, equipment, direct labor, and subcontractor costs. Other direct costs are:
Supplies. Building supplies like lumber, stone, or fencing that are project-specific are all direct costs.
Staff. Supervision and oversight, including the hourly or salary costs of on-site project managers and superintendents are direct, project-specific costs. In cases where a project manager works on multiple projects, the amount of time spent on a project should be billed to that project.
Job site equipment. Temporary on-site offices, container boxes, and equipment needed for the project are all billed directly to a job.
Surety bonds. If a performance bond is required, this would be considered a direct building cost.
Travel expenses. If an out-of-town contractor or subcontractor is needed due to resource shortages, pre-approved travel expenses may be incurred and would be considered a direct building cost.
Standby (or wait) time and scheduling delays. This unwelcome and unbudgeted time is project-specific and can cause unforeseen expenses. For example, if a company hires a crane, and the operator faces obstacles or delays on the project site, that company will charge for the downtime. Similarly, if a material delivery is late, there can be unexpected costs or expenses related to the delay.
Indirect construction costs are those that are not directly billed to a single project, but still critical for most, such as the expenses of administrative processes and salaries for staff.
While indirect costs are usually lower than direct expenses, it is necessary to know the annual volume of projects and the administrative overhead costs that drive them in order to calculate a company’s true overhead percentage. Much depends on how each business is structured and organized. This is why a standard 10% applied to all projects for overhead does not work. A few examples of indirect construction costs include:
Mobilization of units. Restoration companies have workers on standby 24/7, so the charges for after-hours calls and other unforeseen services are considered indirect costs. When companies can charge for an after-hours service call or regular service call response fee, that is intended to shift some of the indirect costs to direct cost.
Offices, equipment, and staff. A company’s shops and offices, equipment, tools, and staff vehicles are among the many indirect expenses associated with operating a business, along with employee benefits, accounting services, liability insurance, and general risk insurance that provides blanket coverage. Financial services, accounting, and legal expenses are part of this, too. Employee training, vacations and benefits fall to indirect costs as well. These are not typically directly billed to a project.
Recognizing and accurately distinguishing direct costs vs. indirect costs can help ensure that project estimates do not carry incorrect costs. For more information about the direct and indirect costs, reach out to RMC Group today.
This information is intended for informational purposes only. Each restoration project has unique properties and must be evaluated individually by knowledgeable consultants. Additionally, cutting samples of roof assemblies should be performed by qualified professionals and in some instances approved by the roofing manufacturer. RMC Group is not liable for any loss or damage arising out of or in connection with the use of this information.