To run a successful construction company, you need to recover all your costs and then some. Generally there are three kinds of costs in a construction project:
Craft workers and labourers, materials, and equipment all represent direct job costs.
These can be supervision, planning, and maintenance expenses for equipment used on site.
Overhead costs don’t directly apply to the current job. They include:
- staff who oversee payroll and purchasing,
- incorporation costs,
- office rent,
- union dues.
While not directly related to any one job, overhead costs never the less need to be recouped.
Recovering Direct and Indirect Job Expenses
Direct and indirect costs are straight forward. It’s easy to say that they’re directly related to the cost of the job, and they can be recovered by posting payroll timesheets, material invoices and equipment timesheets directly to the job where they’re used. Abio has a number of mechanisms to invoice job costs.
The Best Approach for your Job
While direct and indirect costs are clearly related to the job, it can be challenging to ensure they all make their way to the customer. And, how do you recover overhead costs from your clients? Typically overhead costs are posted to general ledger accounts. Unlike expenses posted to jobs and equipment, general ledger costs aren’t directly recovered from clients. How you recover overhead costs depends on the kind of construction your company does. Generally, construction can be categorized as residential, commercial, or industrial. Likewise, jobs can be costed out as fixed price, or time and materials. Overheads can be recovered differently depending on how you are billing your job and the resources you have available. Let’s look at the three types of construction we identified.
With residential construction, you’re often dealing with a home owner and not a corporation. And, you may have several projects going simultaneously, so your overhead costs need to be apportioned accordingly.
If the job is cost plus, overhead will be accounted for in the ‘plus’ portion. One formula residential contractors use is to start with the rate you’re paying your workers, then add a percentage markup to cover the overhead costs. Then, add another percentage markup to cover profit.
If you are taking a cost plus approach to your job, you can set your markup rates for labour and materials when you set up the job. The markups will be applied any time you are reviewing a job’s time and materials costs
One way to bill job costs is to use the Abio web app on site. It will itemize everything posted to a job, apply time and materials markups, and format it into a day sheet report your client can sign off on. That day sheet, along with any supporting documentation, will be used to generate your client’s invoice. The Client Daily Reports present the same information in a different format. With this approach, clients see only the marked up costs.
If your clients want to see the markup separately for each cost centre, the Job Markup utility will create an invoice with line items for each mark up, one per cost centre. A contra entry posted to a G/L account will zero the invoice. Because the invoice items for the markups are posted to jobs, they’ll be recovered from the client. The contra entry, on the other hand, is only for bookkeeping purposes and doesn’t detract from your revenue.
For fixed price jobs, you’ll apply that calculation up front. Determine the number of hours the job will take. When you’re extending the cost of those hours, include an amount per man hour to cover your overhead costs.
Side note: Be sure to take advantage of Abio’s forecasting feature if you are working on a fixed price job.
For larger jobs, you might have more labour related expenses to pass on than a simple markup can cover. Living out, meals and taxis can be identified as labour expenses to be passed on to clients in their time and materials billing. Abio allows you to specify more complex markups when you are using labour rate types for a job. You will mostly set these up by occupations, but you can also set up individual markups by employee.
Large commercial jobs can be set up with both a parent job and a shadow job. Shadow jobs are by convention prefixed with a Z, and sometimes referred to as Z-jobs. Intercompany Invoicing will select all unextracted payroll, materials and equipment records and create an invoice from the shadow job to the parent job for their marked up amounts. Each record is then marked as extracted, and so won’t be picked up the next time intercompany billing is run.
With very large projects you may be able to bill overheads directly. This is something you’ll negotiate up front with your client. Then, instead of billing office staff to G/L accounts, post them to your main job. You can designate a specific cost centre for overhead costs. Or, you can set up a separate area within the job, specifically for indirect and overhead costs. This approach simplifies your job costing reports.
Material markups are recorded on the job as a percentage. The time and materials billings will apply this markup to any A/P invoices posted to the job.
Large projects can be distributed to specialized companies within your organization. If equipment is owned by a subsidiary, they can internally bill equipment to the company holding the contract. These billings will be calculated based on the 28 day equipment rate specified for the job. The invoice you receive from your own equipment company can then be passed on to the client as a job cost. Invoice costs are treated as materials, so would be subject to the material markups set up on the job.
Likewise, your organization may have labour or fabrication companies that will contribute to the project. Intercompany Billing will pass these costs on to the company holding the contract. If you’ve set up labour rate types, the overheads and daily or hourly rates will be applied to labour timesheets.