Costs like labor, materials, and equipment are obvious andare included in most construction project budgets. But there are several hidden costs that affect projects and are integral to getting the work done that are often left off the budget. These include insurance, bonds, vehicle expenses,technology, and overhead costs.
Including these costs in your project budgets allows you to recoup the costs by charging your customer. Adding these costs to your budget will allow you to track your costs more accurately and increase profitability.
Since most insurance premiums are based on the amount of revenue you have during the policy year, you should be including a portion of your premium in each project’s budget. The more work you do, the more potential exposure you have, so your premiums go up. Adding 1 to 2% to the cost of your project should cover your general liability premium in most cases. You’ll need to do the math to get an exact figure.
When more work gets added to the project in a change order,don’t forget to add the insurance cost there as well. At the end of your policy year, you’ll be audited, and the insurance company will be looking at your total revenue. So, make sure you’ve included the additional insurance costs in your change order proposals.
On most public works projects you’ll be required to purchase performance and payment bonds. These bonds help protect the project owner from unpaid bills and incomplete work. The premiums for these bonds can be added to your budget for the job.
Some projects may require other bonds, like maintenance,subdivision, or warranty bonds. These costs can also be added to the project budget and passed on to your customer.
Don’t forget to add additional bond fees to change orders on bonded projects. Bond rates vary from about 1 to 3% of the contract value,depending on the type of work and the type of bond. The surety company will be requesting a final contract value at the end of the project and will be adjusting the premium accordingly.
Expenses for vehicles that are used on the job can be considered part of the project budget. Supervisors who may go to the same project for weeks or months are a cost to the project and should be added to the budget. Include costs for fuel and maintenance for equipment and passenger vehicles.
These days there’s lots of technology on every project.Workers have smartphones, tablets, computers, laptops, and printers. If these assets are being used at the same project for an extended period of time, they can be captured as a job cost and should be part of the budget.
You can also capture the cost for project management software in your project budgets. Software is an asset that benefits each project,so the cost can be spread throughout active projects.
Many companies categorize overhead, like office and administrative labor and office rent and utilities, as a business expense and do not try to include it in the project budget. The truth is without the project, there would be no need for some of the overhead, so the costs can be spread throughout the projects. Most companies do this by allocating a percentage of overhead costs to each project. Accounting software can do this allocation for you, once you figure out how much, or you can do the calculation by hand.
Now that you know the hidden costs that you aren’t including in your construction project budgets, you can begin tracking them. You may be surprised at the amount of costs you aren’t capturing. This can eat into your profitability and cause cash flow issues. Capturing hidden costs and passing them on to your customer will increase your profitability and relieve cash flow headaches.
By: Dawn Killough- Construction Writer