Quick – how much is the contract job you’re working on costing you? Did you include the expenses you incurred for contract labor? equipment? fuel? If you didn’t, you may not really have a true picture of the cost of your job.
Equipment and fuel are necessary to run your business and both are used on multiple jobs. Although they aren’t direct expenses to individual jobs, it’s important to apply these “indirect” costs into the total cost of each job.
The key is finding the right method that fits your business’s needs and your management style. For example, a heavy equipment contractor might allocate a percentage of the cost of equipment to various jobs, while an electrical contractor may divide man hours into specific jobs. The important thing is to identify and segregate these costs, evaluate them, and apply a consistent methodology to allocate them to each contract. This may require a bit of trial and error, and testing your methodology job by job until you’ve fine-tuned your process.
Indirect Costs and Estimating
As you begin to allocate your indirect costs to the individual contracts your business has, you’ll also want to be sure that your job estimates mirror the same method of allocating indirect costs. Otherwise you won’t be comparing apples to apples as your work progresses and you begin to compare the estimate to costs incurred in the job. Using a consistent allocation process in the bid and in estimating actual costs can help you ensure an accurate barometer of your job’s costs.
A Word About General & Administrative Costs
General administrative costs, according to generally accepted accounting practices, should not be allocated to individual contracts. We recommend that these costs be managed through budgeting. Also, most computer payroll programs can also be set up to include employer tax, worker’s compensation, health insurance and fringe benefit costs into wages.
Your financial advisor can assist you putting together an indirect cost allocation method that makes sense for your business, as well as help you implement adding these costs to your estimating process.