Any business owner must have at least a passing understanding of the financial intricacies that underpin the working world. Yes, you can hire an accountant to make the numbers make more sense and to take care of that day-to-day financial operations, but if you really want to run your construction business in a top-down, wood for the tree’s kind of way, you need to know what makes those numbers tick.
One key area that might come in handy is being able to distinguish between two pivotal (and typical) types of expenses often seen in construction: Direct Overhead and Indirect Overhead. Today, we’ll be unpacking the relevance of these expenses, how they work within the construction industry and why discerning between them will be indispensable if you want your fledgling business to be a success.
What are Direct Overheads?
Direct overhead expenses are costs intricately linked to a specific project or job. These expenses are indispensable for project completion and can be directly tied to a particular jobsite or contract. A thorough comprehension of these costs means you’ll be better equipped to make more informed decisions with ongoing projects when it comes to resource allocation on specific projects and general project oversight.
As direct overhead costs directly affect the profitability of individual projects, properly calculating and allocating these expenses also ensures that you can bid competitively while maintaining profitability.
What are Indirect Overheads?
Indirect overhead expenses involve costs that, although necessary for your business’s overall operation, can’t be directly linked to a specific project. These costs include everything from general administrative expenses to rent, utilities, and more.
Indirect overhead costs are typically incurred by your business as a whole and are spread across multiple projects. Understanding these costs helps you make informed decisions about the allocation of resources across the entire business and ensures the overall health of your company. If the direct overheads are the tress, then the indirect overheads are definitely the wood!
Why Knowing the Difference Really Matters
In the construction industry, being able to distinguish between direct and indirect overhead is so much more than an accounting exercise; it profoundly impacts the profitability and decision-making of your business. You’ll inevitably incur both types of expenses throughout your operating life and a clear understanding of where your expenses fall will allow you to make informed choices regarding everything from project pricing and cost management to overall operational optimisation.
By discerning these expenses and their impact on your operations, you can make informed decisions that enhance the profitability of your business and ensure long-term sustainability. Remember, however, to always safeguard your construction business with builders’ insurance. This will protect you against any unforeseen risks and uncertainties and help to mitigate your indirect costs.
