Understanding Contract Costs

Too many times I hear from contractors that they don’t understand why they aren’t making more MONEY!  They are always busy, and have a great track record for winning bids.  They also show a great profit margin on their open job schedules.  But when I ask what their indirect allocation rate, or overhead rate is, they get that deer in the headlight look.

Contract costs are defined as direct costs, indirect costs and overhead costs.  Too many times the owners and estimators at construction companies do not know what costs or the rate that should be used to allocate those costs to contracts and how to do it.  In certain cases, the owner understands that indirect job costs should be allocated to contracts, but incorrectly include general and administrative costs.  This will adversely affect winning the bids on projects as they will have higher costs included in their bids.

These hidden costs can have a significant effect on the profits of the company.  Many Companies have a computer program that allocates the costs automatically, but neglect to analyze the allocation at year end to determine if it is accurate.  If the estimators are using an incorrect rate in their bids, the project is doomed from the beginning.

As a Certified Construction Industry Financial Professional I can help you identify the indirect costs and allocation method that is right for your business.

If you have questions about contract costs and allocations please contact Sean Pierce, CPA at spierce@claruspartners.com or call 614.545.9100.

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