Since indirect costs are typically recurring obligations-like utility bills and employee salaries-deducting these expenses from revenues can give companies insight into budget planning. Maintaining a budget is essential for construction companies to understand their financial position, which is necessary for placing bids on construction contracts, acquiring necessary equipment or personnel. Understanding indirect costs can help companies better develop budgets for planning and starting construction projects. Indirect costs are also important for financial reports because these types of expenses account for continuous business practices that companies must deduct from revenues to gain insight into profitability. For instance, companies must report expenses, income, profits and losses with additional financial information when filing state and federal taxes. Indirect costs are important for financial reporting purposes. Understanding how indirect costs affect the business's processes can help it determine where to distribute income to support business growth and profitability. Indirect costs can give a business valuable information about how much it can expect to cover in recurring costs each accounting period. Additionally, indirect costs are important for performing several essential business processes, including: Cost allocationĬompanies must know in which areas of their operations they should allocate business funds. Although these types of expenses aren't directly associated with completing a construction project, indirect costs are necessary to develop, bid on and establish contracts for client projects. Indirect costs are essential to business functions. Related: What Are Indirect Costs? Definition and Examples Why are indirect costs important? Miscellaneous costs: Office supplies, technology and computer equipment, shipping and postage costs, company vehicles and other expenses can also be a part of a business's indirect costs. Marketing and promotional activities: Costs associated with promoting a business, finding clients and initiating contracts are also indirect costs that many construction companies take on in order to grow a business. Mortgage, rent and utilities: Companies are responsible for indirect costs of maintaining an office space, including rent or mortgage payments, utility bills and other costs related to maintaining a business property. Several indirect costs construction companies often have include:Īdministrative and office staff: Construction companies' indirect costs often cover salaries for office personnel like bookkeepers, office assistants, managers and other staff who are integral to the function of a construction business. Unlike direct costs of construction (which account for expenses that are necessary to complete construction projects), the indirect costs that a business pays are necessary to maintain essential processes and add to business growth. For instance, expenses that cover the costs of administrative processes and salaries for staff are indirect costs that construction companies are typically responsible for. Indirect Costs: What Is the Difference? What is an indirect cost in construction?Īn indirect cost in construction is an expense that doesn't relate directly to the functions, products or operations of a construction project. In this article, we discuss what an indirect cost in construction is, why indirect costs are important and how you can analyze indirect costs with tips to streamline these expenses to reduce unnecessary spending and support business growth and profitability. While direct costs are inherently necessary for each project a business takes on, the indirect cost in construction can vary between projects and can include both administrative costs and additional costs companies incur to stay in operation.Īdditionally, understanding the indirect costs of construction is important for supporting many business processes. Construction companies take on a wide range of expenses that directly and indirectly relate to construction projects and business operations.
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