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How to Calculate Overhead and Profit in Construction

How to Calculate Overhead and Profit in Construction Banner

 

Do you need tips on how to calculate overhead and profit in construction?

Your job is to minimize overhead and maximize profit margin without harming the quality of the project. This task seems daunting at first glance. Although reducing overhead can seem next to impossible, you can do it with the right approach and a little planning. Learning how to calculate overhead and profit in construction is an essential skill you can’t overlook, and this guide points you in the right direction.

Note: Check out the Definitive Guide to Construction Bidding and the Definitive Guide to Project Budgeting for Contractors while you’re here!

What Are Overhead Expenses

In simple terms, overhead expenses are the costs related to running your construction project that doesn’t directly contribute to your bottom line. Examples include staffing, utilities, construction trailers, material cost, and more. Knowing these overhead costs in advance allows you to calculate your overhead and profit margin.

You can then decide if your business is on the right track or if you need to make changes to reach your long-term goals. The tips you are about to learn work wonders for anyone who wants to learn how to calculate overhead costs in construction projects.

Craft a Project Timeline

When you are calculating your construction overhead percentage, your first job is coming up with a project timeline. Your timeline lets you know how long you need to pay your staff and helps you add up any rental fees along the way. If you have the experience, compare the size of the current project to projects you have completed in the past.

Find the average length of time it took you to complete past projects of a similar size, and you have a timeline. You now know the number of hours you will have to pay for staff and how long you will need rental equipment.

Decide the Number of Staff You Need

It’s now time to calculate the number of staff you need for your upcoming construction project. Based on the size of the project, you should know how many general laborers it will take to get everything off the ground. Don’t forget to consider the number of specialists and management staff your project requires. In addition to calculating base pay, determine how much overtime you will pay your team during the project. This gives you an idea of labor cost.

Calculate the Cost of Your Materials

The cost of your materials is another factor you must consider when looking at your construction overhead operating costs. Like with your other expenses, you can calculate your overhead based on similar projects you did in the past. You also want to take measurements so that you know the exact amount of materials it takes to do the job. Comparing your calculations to past projects confirms you are on the right track.

Consider Your Profit

Once you know your overhead costs and direct costs, you can calculate how much profit you will make for your upcoming construction project. Add your overhead to your direct costs to get your total expenses. You then subtract your total liabilities from the amount you charge for the project to get your profit.

Look at your profit to decide if you are earning as much as you need to reach your long-term business goals. If you are not on track for your goals, you might want to make some changes or reconsider your approach.

Reducing Overhead

Reducing your overhead is one of the most potent ways to increase your profit without overcharging your clients. If you have already created a list of all your expenses, this part should not be too difficult. You must look at the individual costs and consider whether you can reduce them without harming the quality of your results.

For example, you might be able to reduce the cost of your materials by ordering larger quantities. Maintaining your equipment can reduce breakdowns and improve fuel efficiency. Hiring more team members might be cheaper than paying overtime benefits. Each small cost you reduce adds up and affects your bottom line.

Simplify the Process to Calculate Overhead and Profit in Construction

You can add up everything on your own with a sheet of paper, but it will take much longer than it must. On the other hand, you can use construction management software to save time and money. Sitepod is project management software designed with construction professionals in mind.

It offers a construction markup calculator and construction overhead cost estimating. You can use Sitepod’s contractor profit margin formula to determine whether your business is on track quickly. If you would like to learn more about how Sitepod can benefit your bottom line, contact us today.