Construction Business Expenses: Understanding Indirect vs. Direct Overheads
Whether you own a construction business or you’re thinking about starting one, understanding the costs involved is one of the basic things you simply must know. If you don’t, then it could lead to business failure. The costs can be separated into two categories known as indirect and direct overheads.
Both of these link to your cash flow and mismanagement of this is among the most common reasons for businesses failing in the UK. To make sure this doesn’t happen to you now or in the future, we want to help you understand what these costs mean and what’s included in both of these categories.
Learn more about construction business expenses below, so you’re better prepared for managing your company.
What are direct overhead costs?
A direct overhead expense can also be described as a fixed cost. These expenses will be paid whether your business is making money or not and without them, your business won’t be about to run. Some common direct overhead costs in the construction industry include:
- Full-time employee wages
- Subcontractor costs
- Facility costs
What is an indirect cost?
These costs do not directly contribute to your construction work, but they can still make a large impact on your business. Some of the indirect costs you may have with the construction industry include:
- Marketing costs
- Travel expenses
- Utilities
Why is understanding the difference important?
Being able to keep track of your business expenses and the different types is vital to the successful running of your business. This is because it will help you with the pricing of your services as you’ll need to charge more than your direct and indirect costs to turn a profit.
Knowing where all of your costs are coming from and how much they cost will also help with the future of your business too. By understanding the costs, you may realise that there are ways to cut your expenses down to increase the chance of making more money each year.
Calculating your costs
If you’re starting a new construction business, then on average it costs £5,000 to bring your services to market. However, you’ll need to make sure you budget for every expense from getting the right builder’s insurance to calculating your material and labour costs.
You should take time to list all of the expenses and do your research to see how much each item will cost. This will indicate whether you can afford to run your own business yet.
As you can see, understanding what the different costs of your business mean as well as how you can calculate them is vital to the successful running of your construction company.