Unit II.

RATE ANALYSIS
a) Unit Rate,
b) Direct Cost, Indirect Cost,
c) Overhead Charges,
d) Day Work, Task Work, Piece work,
e) Indent of Material
Unit II.a. Unit Rate,
A unit rate is a rate with 1 in the denominator. If you have a rate, such as price per some number
of items, and the quantity in the denominator is not 1, you can calculate unit rate or price per unit
by completing the division operation: numerator divided by denominator.
A unit rate is a special type of ratio (also called a single-unit rate). It will compare 1 unit of some quantity
to a different number of units of a different quantity. Unit rates are often used in real life situations, like
when you need to convert between measurement systems. Any ratio that is not a unit rate can be turned
into one.
What is Unit Rate?
A unit rate can be used to describe how many units of the first type of quantity corresponds to one unit
of the second type of quantity. A few examples of unit rates are km/hour, m/sec, cost/litre, etc.
How to Find Unit Rate?
In a unit rate, the denominator is always 1. So, to find unit rate, divide the denominator with the
numerator in a way that the denominator becomes 1.
For example, if 50km is covered in 5.5 hours, the unit rate will be 50km/5.5 hours = 9.09 km/hour.
What is the meaning of unit rate?
Unite rate is a unit that compares two units i.e. how many units of the first type of quantity
corresponds to one unit of the second type of quantity.
What are a few examples of unit rate?
The unit rate is very common in day to day life. A few examples of unit rate are kilometre
per hour (km/hour), cost per litre, profit per item, etc.
How do you find the unit rate in math?
To find the unit rate, divide the numerator with denominator to make the denominator as 1.
What is the difference between a rate and a unit rate?
The difference between a rate and a unit rate is that a rate is the ratio between two different units of
measure, while a unit rate is the ratio of between two different units of measure for a single thing.

What does unit rate mean?

A unit rate describes the ratio of two different units for the quantity of one. Some of the unit rates
we use every day are miles per hour someone travels, price per pound of meat, and price per day
for a rental car. We can find the unit rate when given a rate by dividing the unit in the numerator by
the quantity in the denominator.
 2. Direct Cost, Indirect Cost,

Direct costs are costs that can be identified easily as per the expenditure on cost objects. For
example, if we pick how much expenditure a business has had on purchasing the raw materials
inventory, we will be able to directly point out.

In the case of indirect costs, the challenge is that we can’t identify the costs as per the cost
object. For example, if we try to understand how much rent is given for sitting of the machinery in a
place, we won’t be able to do it because the rent is paid for the entire space, not for a particular
place.

Why does the difference between direct and indirect cost matter?
To sum up, direct costs are expenses that directly go into producing goods or providing
services, while indirect costs are general business expenses that keep you operating. But,
why does the difference matter?
Direct costs
Direct costs are business expenses you can directly apply to producing a specific cost
object, like a good or service. Cost objects are items that expenses are assigned to.
Examples of direct costs include:
• Direct labor • Manufacturing supplies
• Direct materials
Direct costs can be variable or fixed. Variable costs are expenses that change based on
how many items you produce or how many services you offer. For example, you would
spend more money producing 200 toys as opposed to 100 toys. Fixed costs are expenses
that remain the same each month.
Knowing your direct costs is a key part of determining your product or service pricing. You
want to make sure customers pay you more than what you pay to produce your products or
offer your services.
Example
Let’s say you have an employee who puts together toys. The employee’s work is
considered direct labor. To create the toys, the employee needs wood, which is considered
a direct material. And, the employee must use wood glue, which is a manufacturing supply.
Knowing the costs that go into producing the toys helps you better price the goods and turn
a profit.
Indirect costs
Indirect costs are expenses that apply to more than one business activity. Unlike direct
costs, you cannot assign indirect expenses to specific cost objects.
Examples of indirect costs include:
• Rent
• Utilities
• General office expenses
• Employee salaries (e.g., administrative)
• Professional expenses
• Other overhead costs
• Like direct costs, indirect expenses can be either fixed (e.g., rent) or variable (e.g.,
utilities).
You can allocate indirect costs to determine how much you are spending on expenses
compared to your sales. To do this, find the overhead rate, or indirect cost ratio.
Here is the overhead rate formula:
Overhead Rate = Overhead Costs / Sales
Example
Let’s say you make rent and utility payments to keep your business going. And, you must
buy computers. These costs are not directly related to producing a specific product or
performing a service, so they are indirect costs. Indirectly, they help you produce goods
and perform services, but you can’t directly apply them to a specific product or service.
To get an idea of how your overall expenses compare to your overall sales during a period,
you find your overhead rate.
You had $4,000 in indirect costs and $16,000 in sales during the period. Your overhead
rate would be 0.25, or 25% ($4,000 / $16,000). This means that you spend 25 cents on
indirect costs for every dollar you earn. If your direct costs are also high, you won’t be
turning much of a profit.
Overhead rates vary from industry to industry. But you should try to keep your overhead
rate minimal. The smaller your overhead rate, the better.
 b. Direct Cost, Indirect Cost,
Types of Construction Project Costs – Direct and Indirect
Costs
Types of Construction Project Costs
Before moving into the main classification of project costs, some of the specific costs
encountered in construction projects are explained below.

1. Fixed Cost
This is defined as the cost spent once for a particular point of time. The purchase of
equipment, machinery etc comes under fixed cost assets.

2. Time-Related Cost
Time-related cost is the cost spend for a particular activity for a given duration. The cost spent
on wages, equipment and building rents etc comes under this category.

3. Quantity -Proportional Cost

This type of cost will vary based on the quantities. Materials costs are examples of quantity-
proportional costs. Major classification of construction projects costs are:
1. Project direct costs
2. Project Indirect Costs

Total Project Cost = Project Direct Costs + Project Indirect Costs

Direct Costs of Construction Project

The costs and expenses that are accountable directly on a facility, function or product are
called as direct costs. In construction projects, the direct costs are the cost incurred on labor,
material, equipment etc. These costs for a construction project are developed as estimates by
means of detailed analysis of the contract activities, construction method, the site conditions,
and resources. Different direct costs in construction projects are material costs, labor costs,
subcontractor costs, and equipment costs.

Indirect Costs of Construction Project

The costs, unlike direct costs, is not directly accountable for a particular facility, product or
function. Indirect costs can be either variable or fixed. The main sections coming under indirect
costs are personnel costs, security costs, and administration costs. These costs do not have a
direct connection with the construction project. The indirect cost can be classified as:

1. Project Overhead Costs

In a construction project, the cost of some of the items cannot be directly allocated for a
specific activity. Most of the site related costs come under this section and are categorized as
project overhead costs. Project overhead costs can either be fixed or time-related costs.
Different costs coming under overhead costs are the costs of stores, safety facilities,
workshops, offices, staffs and parking facilities. All those plants that are required to support the
working crews will come under this cost. The overhead cost is estimated by a detailed analysis
of the site-related activities and their cost. Hence an accurate cost estimate is obtained. Most
of the companies make use of forms and checklist developed by them to estimate these costs.
The site overhead costs account for 5 to 15% of the total project costs.
2. General Overhead Costs

Direct Costs vs Indirect Costs

Cost classification is an important process in budgeting, accounting, and project
management. Cost classification and categorization of expenses help project
teams to understand what kind of costs will be spent during the life cycle of their
project. For example, in a construction project, a cost control engineer lists the
direct cost and indirect cost items while creating the baseline budget.
Basically, Direct costs vs indirect costs is an important concept that every
project manager should know. Although there are some significant differences
between them, it is not easy to make a clear distinction between direct and
indirect costs all the time. A distinction can be made depending on the nature of
the product and business.
 Typically, direct costs are attributable to a product, goods, or service itself. In
other words, direct costs are directly related to production. On the other hand,
indirect costs are those which is required to produce the product but not directly
related to the product itself. This article answers the following typical question:
what are the primary differences between direct and indirect costs?

Cost Classification
Cost classification is the process of distinguishing costs into subcategories. For
this purpose, a classification method is required to categorize and prioritize costs
for financial modeling. Many different types of cost classifications can be made
such as;
• Direct and Indirect Costs
• Fixed and Variable Costs
• Customer Costs
• Departmental Costs
• Manufacturing Costs
If you don’t understand the difference between the cost categories, you will have
difficulties while managing a project’s budget or operating a business.
Therefore, it is important to recognize the classification while purchasing material
or estimating project expenses.
Assume that you are a project manager of a house construction project and the
client makes a change request related to changing the perimeter walls from
reinforced concrete to masonry. The first thing you should do is to make a unit
price analysis and classify the costs according to their type. Material, labor, and
machinery costs are direct costs and increases as the amount of work increases.
On the other hand, project management and operational costs are indirect costs
that don’t directly relate to the amount of work but increase as the duration of the
project increases.
Basically, costs can be divided into two major categories according to the
element/nature. For better understanding, let’s analyze each concept.

Direct Cost
A direct cost is a price that can be utterly attributed to the production of products
or services. Some costs, such as direct materials, direct labor, equipment are
examples of common direct costs.
In some cases, it is possible to classify an indirect cost as a direct cost. For
instance, the salary of the manager who controls multiple concrete batch plants
would be considered as an indirect cost for each batch plant. However, that
manager’s salary would be a direct cost for the department which comprising all
of those concrete batch plants.
Direct costs are often variable costs. If the manufactured units increase, direct
costs increase. Because creating more units requires more materials and
resources.
Example
Assume that, you will produce 1000 m3 concrete in the batch plant. You need
300 tons of cement to produce 1000 m3 concrete and 1 ton cement costs 100 $.
So you need 30,000 $ to purchase cement. This is your direct cost. As the
quantity increases direct cost increase.

Indirect Cost
Indirect costs are those which affect the whole company such as depreciation,
accounting services, general supplies, board salaries, and overhead costs. They
are not spent just on only one product. Overhead costs, ongoing costs, project
management costs, operational costs are indirect costs.
Indirect costs are often fixed costs. But also they can be variable.
For instance, the rental cost of your head office is a fixed cost. The quantity of
manufactured units doesn’t affect your rental price. Another example of a
variable cost is your heating and cooling expenses that can change on a monthly
basis.
For cost controlling purposes, many companies try to limit their indirect costs as
a proportion of direct costs.
Example
Going back to the same batch plant example. Assume that this month you will
produce 1000 m3 concrete. If you increase the production and produce 1500 m3
concrete this does not change your head office costs or marketing costs.

Examples of Direct Costs and Indirect Costs

Direct Cost Examples
 The following are a few examples of direct costs
• Laborer’s wages
• Wood, Glass, Cement, Concrete, Rebar, etc.
• Handles, locks, hinges
• Direct materials
• Consumable supplies
• Freight in and out
• Sales commissions
• Royalty Payment
• Patent Holder
• Consultants
• Tools

Indirect Cost Examples

 The following are a few examples of indirect costs.
• Advertisement costs
• Project management costs
• Operational Costs
• Insurance
• Depreciation
• Manager’s salary
• Indirect costs related to transport
• Administration cost
• Indirect employee’s salaries
• Security cost
• Office cost
• Selling & distribution cost
• Factory overheads

What are the Primary Differences Between

Direct and Indirect Costs?
Below are some differences between direct costs and indirect costs.
• It is easy to determine direct costs considering the product or service. On the
other hand, it is not easy to identify indirect costs. Detailed analysis is required to
identify indirect costs.
• Direct costs are attributable to a specific product, department, goods, or service.
On the other hand, indirect costs are attributable to multiple products or services.
• Direct costs are variable costs that change based on the quantity of a product or
service. However indirect costs are fixed costs.
 Difficulties in Cost Classification
There are some costs that can not be classified easily either direct or indirect.
Some indirect costs such as hiring a consultant or traveling expenses are
sometimes categorized as direct costs depending on the circumstances. In that
case, organizations often classify them according to their nature and usage.
Overhead costs are indirect costs that are related to direct costs.

Summary

If you want to classify cost according to the element or nature, you should use
two categories which are direct and indirect costs. Cost classification process is
very important in project cost management. It enables to develop an
effective cost control and profit planning system. If you don’t know which cost is
direct which expense is indirect, you cannot perform cost control effectively.
Also, it is helpful for decision making.
It is significant to have a clear understanding of cost classification. During the
procurement of goods or a service, you can compare their direct and indirect
costs to your project separately. One option may involve more indirect costs than
the other. So you can select the alternative with the low indirect cost.
Classification of expenses has an important impact on federal tax payments. It
also affects a company’s cash flow and financial health.
DIRECT VS. INDIRECT COSTS IN THE CONSTRUCTION
INDUSTRY

A new project manager at your construction company is consistently seeing margins deteriorate at the
end of their construction projects. The key question when confronting this situation is to determine if
project management and accounting know and understand their costs. Knowing your costs can improve
the bidding process and help you determine problem projects and employees.

DIRECT COSTS
Construction costs that are specifically allocable to construction contracts are typically referred to as
direct costs. Common direct costs are often made up of materials, direct labor and subcontractor costs.
There is little ambiguity with these costs, and they are typically easy to apply or assign to a specific
construction contract.

INDIRECT COSTS
In contrast, construction costs that are not specifically allocable to construction contracts are typically
referred to as indirect costs. The three most common types of indirect costs include:

• Overhead – Job site costs, home office costs and general conditions

• Project Managers, Superintendents and other Support Staff

• Office Trailers, Equipment and Supplies

• Insurance, Office Salaries and other Miscellaneous Costs

• Equipment – Owned equipment and small tools

• Depreciation

• Repairs and Maintenance

• Taxes and Insurance

• Labor Burden

• FICA Taxes

• Workers Compensation

• Federal and State Unemployment

• Vacation and other Fringe Benefits

COMMON PITFALLS WHILE ALLOCATING INDIRECT COSTS

However, when allocating indirect costs, be aware of the common mistakes people often make. A few of
these common pitfalls include:

• Not considering indirect costs in your bidding process.

• Not allocating indirect costs on a timely basis (i.e. annually instead of monthly).
Maintaining timely records and being sure to include all costs during the entire project will help you
avoid any potential errors.
Keeping track of your construction project costs can be tricky and time consuming. Being able to
understand the difference between the two different types of costs will not only help you improve your
margins but will give you a better estimate of your project spend.

Direct costs
From Wikipedia, the free encyclopedia
Jump to navigationJump to search
See also: Indirect costs
Direct costs are costs which are directly accountable to a cost object (such as a particular
project, facility, function or product).[1] Direct cost is the nomenclature used in accounting.
The equivalent nomenclature in economics is specific cost. By contrast, a joint cost is a
cost incurred in the production or delivery of multiple products or product lines. For
instance, in civil aviation, substantial costs of a flight (pilots, fuel, wear and tear on the
plane, landing and takeoff fees) are a joint cost between carrying passengers and carrying
freight, and underlie economies of scope across passenger and freight services. By
contrast, some costs are specific to the services, for instance, meals and flight attendants
are specific costs of carrying passengers.
Direct costs are directly attributable to the object. In construction, the costs of materials,
labor, equipment, etc., and all directly involved efforts or expenses for the cost object are
direct costs. In manufacturing or other non-construction industries, the portion of operating
costs which is directly assignable to a specific product or process is a direct cost.[2] Direct
costs are those for activities or services that benefit specific projects, for example salaries
for project staff and materials required for a particular project. Because these activities are
easily traced to projects, their costs are usually charged to projects on an item-by-item
basis.
 The economics term for the same concept is specific cost.[3]
Direct costs typically include:
• Direct materials used in manufacturing
• Direct labour
• Direct expenses, e.g. a royalty payment to a patent holder for a specific production
process [4]

Indirect costs
From Wikipedia, the free encyclopedia

Jump to navigationJump to search

See also: Direct costs
Indirect costs are costs that are not directly accountable to a cost object (such as a
particular project, facility, function or product). Indirect costs may be either fixed or variable.
Indirect costs include administration, personnel and security costs. These are those costs
which are not directly related to production. Some indirect costs may be overhead. But
some overhead costs can be directly attributed to a project and are direct costs.
There are two types of indirect costs. One are the fixed indirect costs which contains
activities or costs that are fixed for a particular project or company like transportation of
labor to the working site, building temporary roads, etc. The other are recurring indirect
costs which contains activities that repeat for a particular company like maintenance of
records or payment of salaries.

Contents
• 1Indirect vs direct costs
• 2Examples
o 2.1Costs usually charged directly
o 2.2Costs either charged directly or allocated indirectly
o 2.3Costs usually allocated indirectly
• 3See also
• 4References

Indirect vs direct costs[edit]

Most cost estimates are broken down into direct costs and indirect costs.
Direct costs are directly attributable to the object and it is financially feasible to do so. In
construction, the costs of materials, labor, equipment, etc., and all directly involved efforts
or expenses for the cost object are direct costs. In manufacturing or other non-construction
industries the portion of operating costs that is directly assignable to a specific product or
process is a direct cost.[1] Direct costs are those for activities or services that benefit
specific projects, for example salaries for project staff and materials required for a
particular project. Because these activities are easily traced to projects, their costs are
usually charged to projects on an item-by-item basis.
Indirect costs are, but not necessarily, not directly attributable to a cost object. It should be
financially infeasible to do so. Indirect costs are typically allocated to a cost object on some
basis. In construction, all costs which are required for completion of the installation, but are
not directly attributable to the cost object are indirect, such as overhead. In manufacturing,
costs not directly assignable to the end product or process are indirect. These may be
costs for management, insurance, taxes, or maintenance, for example.[2] Indirect costs are
 those for activities or services that benefit more than one project. Their precise benefits to
a specific project are often difficult or impossible to trace. For example, it may be difficult to
determine precisely how the activities of the director of an organization benefit a specific
project. Indirect costs do not vary substantially within certain production volumes or other
indicators of activity, and so they may sometimes be considered to be fixed costs.[3]
It is possible to justify the handling of almost any kind of cost as either direct or indirect.
Labor costs, for example, can be indirect, as in the case of maintenance personnel and
executive officers; or they can be direct, as in the case of project staff members. Similarly,
materials such as miscellaneous supplies purchased in bulk—pencils, pens, paper—are
typically handled as indirect costs, while materials required for specific projects are
charged as direct costs.
Often, such as when applying for funding under a grant, indirect costs are specified as a
fixed percentage, this percentage having been negotiated in advance. This is the case, for
example, in federally-funded research in the United States. In this case, the indirect costs
percentage is specified relative to direct costs, not to the total request. A grant requesting
$100k in direct costs with an indirect cost rate of 50%, for example, means that the request
will include an additional request for $50k for indirect costs for a total request of $150k, as
opposed to a request for $100k of indirect costs for a total request of $200k.

Direct cost
Direct costs for goods and services are those costs incurred directly for production and include items such as
raw materials, labour, equipment, software and power costs. Direct costs can be traced and attributed to
a cost ‘object’ which may be a product, department, cost centre or project.

Indirect costs (sometimes called ‘overheads’) are those necessary to keep a

production facility in business and include rent, insurance, advertising and marketing which, although they
may be included in the cost of the product or service, they are still indirect costs because they do not vary
directly with the volume of goods/services produced and are not easily attributable to a particular process
or project.

The amount added to a product’s unit costs by indirect costs will vary according to production levels, as in the
following illustration:

The direct cost of manufacturing a steel padlock is £1, made up of:

 10p raw materials
 60p labour
 30p fuel/power.

The factory’s monthly indirect costs (rent, equipment, marketing etc) = £50,000

In January, the factory makes 100,000 padlocks, so the indirect cost element attributed to each unit is
£0.50p.

In February, the factory makes 200,000 padlocks, so the indirect cost element attributed to each unit is
£0.25p.

But in both months, the indirect costs have not changed, the only variable is in how much indirect cost is
incurred by each unit.

So, indirect costs do not vary directly with production levels, whereas direct costs remain dependent on
production levels and will vary when production is increased or decreased.
 Indirect costs in construction
Indirect costs (or indirect spend) are those costs that are necessary to keep a process or project running, but
which do not vary directly with the volume of goods or services produced and are not easily attributable to a
particular process or project. This might for example include; rent, insurance, advertising and marketing and
so on. These types of indirect costs may be referred to as overheads.

This is as opposed to direct costs, which are those costs incurred directly by production and include items
such as raw materials, labour, equipment, power and so on. Direct costs can be traced and are attributed to
a cost ‘object’ which may be a product, department, cost centre or project.

So, indirect costs do not vary directly with production levels, whereas direct costs remain dependent on
production levels and will vary when production is increased or decreased.

Indirect Cost in Construction: What It Is and

How To Streamline
By Indeed Editorial Team
April 22, 2021
Construction companies take on a wide range of expenses that directly and indirectly
relate to construction projects and business operations. 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.
Additionally, understanding the indirect costs of construction is important for supporting
many business processes. 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.
Related: Direct vs. Indirect Costs: What Is the Difference?

What is an indirect cost in construction?

An indirect cost in construction is an expense that doesn't relate directly to the functions,
products or operations of a construction project. For instance, expenses that cover the
costs of administrative processes and salaries for staff are indirect costs that construction
companies are typically responsible for. 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.
Several indirect costs construction companies often have include:
• Administrative 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.
• 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.
• 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.
• 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.
Related: What Are Indirect Costs? Definition and Examples

Why are indirect costs important?

Indirect costs are essential to business functions. 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. Additionally, indirect costs are
important for performing several essential business processes, including:
Cost allocation
Companies must know in which areas of their operations they should allocate business
funds. Indirect costs can give a business valuable information about how much it can
expect to cover in recurring costs each accounting period. Understanding how indirect
costs affect the business's processes can help it determine where to distribute income to
support business growth and profitability.
Financial reporting
Indirect costs are important for financial reporting purposes. For instance, companies must
report expenses, income, profits and losses with additional financial information when filing
state and federal taxes. 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.
Budget planning
Understanding indirect costs can help companies better develop budgets for planning and
starting construction projects. 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. 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.
Related: Why Budgeting Is Important (Plus 7 Benefits of Budgeting)

How can you analyze indirect costs?

Even though an indirect cost in construction isn't related to one specific project, companies
usually allocate indirect costs equally among all projects and overhead. Additionally,
indirect costs can affect a business's gross profits it earns from completed projects, so
analyzing indirect costs and distributing them effectively between construction projects is
necessary for the success of the business. The following steps provide more insight into
how you can analyze indirect costs to distribute funds to construction projects:
1. Find your general and administrative costs
To better classify your indirect costs, it's important to understand how general and
administrative costs affect fund allocation. General and administrative costs typically cover
fixed expenses like overhead and remain the same regardless of project volume.
Additionally, these costs can account for the indirect costs that have no direct impact on
project revenue.
2. Determine variable indirect costs
 The variable costs that can affect the completion of projects account for some of the
indirect costs a company takes on and can vary depending on the project. Additionally,
since each project a business initiates requires different considerations, the various
aspects of indirect costs for supporting business processes can include a range of
expenses that can affect revenue. For instance, insurance, safety equipment and
subcontractors are all aspects of variable indirect costs that can change from project to
project. This can mean one project can require certain personnel while another project may
not need the same personnel for completion.
Related: How To Calculate Variable Expenses (With Examples)
3. Classify your indirect costs
After you understand your administrative costs and additional indirect costs, you can
classify each expense into an accounting category. The general and administrative
expense account—which companies call the G&A costs—includes your overhead, and
your variable indirect costs can include the expenses your company incurs when bidding
on projects, initiating contracts and ensuring the completion of each construction project.
Typically, businesses analyze and classify their indirect costs to understand how to
allocate business funds.
4. Establish an allocation method
Once you have analyzed your indirect costs, you can establish a method for allocating
business funds. For instance, many construction businesses may allocate costs based on
labor hours rates, their total direct costs or their direct labor costs. You can also establish
an allocation method based on your company's historical or budget cost data, which can
tell you how your company budgets for key processes like project materials, personnel and
other indirect costs.
5. Develop a plan for adjustments
Making a plan for allocating funds that pay for indirect costs allows businesses to better
plan for adjustments in the rates they charge per project or per labor hour. For example, if
a company requires a different number of employees on a job site from one project to the
next, the company can better plan for rate adjustments based on labor costs. The ability to
modify rates between projects is important for companies to achieve business goals,
generate revenue and remain profitable.
Related: 15 Budgeting Tips and Best Practices

Tips to streamline your indirect costs

Depending on the project, companies may need to cover certain indirect costs in order to
successfully complete project tasks. However, you can streamline your indirect costs to
include only the expenses necessary to support project contracts and business outcomes.
The following tips outline several approaches to streamline indirect cost in construction:
• Track and record spending continuously. Continuous tracking and updates to
the expense records can ensure your indirect cost allocation is accurate.
• Apply indirect costs in accounting software. Accounting software that can
automatically apply indirect costs is beneficial to calculate project rates based on
the criteria your company uses, giving you more insight into cutting costs or
reducing project time.
• Evaluate costs for rate adjustments. Review annual and quarterly budgets to
compare forecasted and historical rates so you can make adjustments to better
streamline your indirect costs.
 Direct Labor vs. Indirect Labor
“Labor” is defined as the total amount of expertise and workforce needed to finish a job,
and it is further broken into two main categories: direct and indirect labor.

Direct
Direct labor is easy to understand and identify. Very simply, it’s the wages you pay
employees. However, these expenses include any benefits that are provided to that
employee, as well, such as healthcare.
Businesses will pay salaries and benefits to company employees in a typical contract and
hourly or pre-project costs to contractors.
The direct costs include only the employees who will work directly on the project. Support
staff (human resources, administration, etc.) are categorized differently.
Examples may include the following:

• Pipefitter

• Foreman

• Rigger

• Laborer

Indirect
Indirect labor supports the company, but individuals do so from a distance. These
employees are not actively involved in the construction or planning.
Examples of indirect labor positions include the following:

• Administration

• Human resources

• Customer relations

• Accountants
While just as integral to a company’s success, these employees work “backstage.”
An easy way to tell the difference is by connection: if you cannot relate an employee’s job
directly to one specific project, they are categorized under indirect labor.

Importance
Understanding direct and indirect costs can save companies money and even stop them
from falling apart.
The labor burden includes the direct and indirect expenses of hiring and employing an
individual. It’s an easy way to see how much money a company can expect to pay for
labor.
In addition to paying an employee’s wage, several factors increase the total cost of an
employee:

• Sick days

• Paid leave
• Worker’s compensation

• Payroll taxes
If these hidden costs climb too high, a company can go out of business.
Furthermore, tracking and comprehending labor is an easy way to make higher profits. The
average construction company only earns 2% to 3% in profits annually, and by reducing
labor even 5%, companies and contractors can improve this net profit to 4% or 5%.
Knowing where to cut safely increases savings. A 20-person crew saves up to $2,500 per
year or more with every 60-second improvement.

How to Calculate
If you’re not the accountant type, don’t sweat it. Calculating the labor burden involves
changing the indirect costs into a percentage of the direct labor costs.
Doing so will tell a company how much it is truly spending on labor:
INDIRECT COSTS/ DIRECT COSTS * 100 = LABOR BURDEN
Tracking down all the numbers is the hardest bit of this equation, but it’s necessary for a
company’s success.
However, don’t stop there. To truly turn this to your advantage, use the labor burden to
determine the labor price. Finding the labor price depends on your markup, the amount of
profit you plan to make:
LABOR WAGE x LABOR BURDEN FACTOR x MARKUP = LABOR PRICE
Once again, it’s easy to see how direct and indirect labor costs can play a vital role in your
company’s future.

How to Obtain Optimal Numbers

So now you’re probably wondering how you can cut anything from direct and indirect labor.
Many solutions are more straightforward than you might think.
Every minute counts. Take a hard look at clock-in and clock-out times. Are workers
clocking out at 3:15 instead of 3:30?
Those 15 minutes can cost you over $30,000 if you have a 20-person team.
Take advantage of apprenticeship programs to cut costs further. Many students studying
particular trades can benefit from such a program, and they almost always work for free.
Next, check-in on efficiency. Is your crew standing around, or are they getting the job
done? Incorporate company policies that clarify production expectations, breaks, and
clock-in and out times.
Analyzing indirect labor is just as important. How many people are necessary to
adequately provide for the company? Some construction businesses have a single person
behind the curtain.
Finally, use technology to your advantage. Keep track of everything and stay organized. It
can seem overwhelming, but many new software programs and platforms are available to
help contractors and businesses keep tabs on costs.
Many can even increase production.
Contemplate wearable technology for your employees, digitize timekeeping and utilize
virtual reality for training and planning.

Additional Costs to Consider

 Bear in mind that labor costs are not the only expenses contractors and owners must
contemplate. Indirect materials and overhead costs also play a factor in a company’s
success.
Indirect materials include construction materials that are too much of a hassle to bother
keeping track of. For example, counting the number of nails and staples required for a
project would take more time than it would be worth.
Examples of indirect materials are abundant:

• Nails

• Staples

• Adhesives

• Lubricants
Fixed manufacturing overhead costs include expenses that stay relatively the same
regardless of the project. These can consist of tool rentals, safety equipment, insurance
premiums, and more.
Finally, variable overhead costs will also add to expenditures. Unlike fixed overhead, these
costs vary with the amount of production, and they are mostly made up of supplies and
utilities.
Don’t forget to allocate for each.

Direct Cost
What Is a Direct Cost?
A direct cost is a price that can be directly tied to the production of specific goods
or services. A direct cost can be traced to the cost object, which can be a service,
product, or department. Direct and indirect costs are the two major types of
expenses or costs that companies can incur. Direct costs are often variable costs,
meaning they fluctuate with production levels such as inventory. However, some
costs, such as indirect costs are more difficult to assign to a specific product.
Examples of indirect costs include depreciation and administrative expenses.
Understanding Direct Costs
Although direct costs are typically variable costs, they can also include fixed costs.
Rent for a factory, for example, could be tied directly to the production facility.
Typically, rent would be considered overhead. However, companies can
sometimes tie fixed costs to the units produced in a particular facility.
Direct Costs Examples
Any cost that's involved in producing a good, even if it's only a portion of the cost
that's allocated to the production facility, are included as direct costs. Some
examples of direct costs are listed below:
• Direct labor
• Direct materials
• Manufacturing supplies
• Wages for the production staff
• Fuel or power consumption
Because direct costs can be specifically traced to a product, direct costs do not
need to be allocated to a product, department, or other cost objects. Direct costs
usually benefit only one cost object. Items that are not direct costs are pooled and
allocated based on cost drivers.

Direct and indirect costs are the major costs involved in the production of a good or
service. While direct costs are easily traced to a product, indirect costs are not.
KEY TAKEAWAYS
• A direct cost is a price that can be directly tied to the production of specific goods
or services.
• A direct cost can be traced to the cost object, which can be a service, product, or
department.
• Direct costs examples include direct labor and direct materials.
• Although direct costs are typically variable costs, they can also be fixed costs. Rent
for a factory, for example, could be tied directly to a production facility.
Direct vs. Indirect Costs
Direct costs are fairly straightforward in determining their cost object. For example,
Ford Motor Company (F) manufactures automobiles and trucks.1 The steel and
bolts needed for the production of a car or truck would be classified as direct costs.
However, an indirect cost would be the electricity for the manufacturing plant.
Although the electricity expense can be tied to the facility, it can't be directly tied to
a specific unit and is, therefore, classified as indirect.
Fixed vs. Variable
Direct costs do not need to be fixed in nature, as their unit cost may change over
time or depending on the quantity being utilized. An example is the salary of a
supervisor that worked on a single project. This cost may be directly attributed to
the project and relates to a fixed dollar amount. Materials that were used to build
the product, such as wood or gasoline, might be directly traced but do not contain a
fixed dollar amount. This is because the quantity of the supervisor's salary is
known, while the unit production levels are variable based upon sales.
Inventory Valuation Measurement
Using direct costs requires strict management of inventory valuation when
inventory is purchased at different dollar amounts. For example, the cost of an
essential component of an item being manufactured may change over time. As the
item is being manufactured, the component piece's price must be directly traced to
the item.
For example, in the construction of a building, a company may have purchased a
window for $500 and another window for $600. If only one window is to be installed
on the building and the other is to remain in inventory, consistent application of
accounting valuation must occur.
Companies typically trace these costs using two methods: first-in, first-out
(FIFO) or last-in, first-out (LIFO). FIFO involves the assigning of costs, such as the
purchase of inventory, based on what items arrived first. As inventory is used up in
the production of goods, the first ones or the oldest inventory items are used first
when measuring the cost of the item. Conversely, LIFO assigns the value of a cost
item based on the last item purchased or added to inventory.
c. Overhead Charges,

Overhead Expenses in a Construction Business

Overhead expenses – the ongoing costs associated with running a business – are different for
construction companies than for a firm operating in any other industry. The nature of
construction work – its relationship with independent contractors, frequent location changes,
equipment rentals and labor costs – puts it in its own category and makes it unlike any other
industry. Overhead expenses for a construction firm can be placed into two broad categories:
direct and indirect.

Indirect vs. Direct Overhead

The estimate for any construction job includes projected overhead costs. Indirect – or general –
overhead expenses are those that are not specific to any particular job but are fees the
contractor pays on a regular basis. These costs are not chargeable to one particular project.
Direct – or job – overhead costs are unique to a specific project and change from job to job.

Top Three Indirect Expenses

There are many types of indirect costs in the construction industry, right down to the cost of a
birthday cake when you throw a party for one of your staff. But several large categories tend to
dominate indirect costs for construction businesses. Among the most common costs
associated with indirect overhead are the salaries and benefits of employees and personnel –
such as bookkeepers, executives and administrative employees – who don't work on an actual
job site.

Your office space is typically a large indirect expense as well, with multiple costs for rent,
utilities, supplies, phone and Internet lines and insurance. Physical property also contributes to
this category, including vehicles and associated costs. Other indirect costs are lumped into the
category of miscellaneous ongoing expenses, such as marketing, advertising, travel costs and
fees for professional services such as lawyers and accountants.

Top Three Direct Expenses

Direct costs are tied to an actual construction project that you are engaged in. The ongoing
costs most likely to accumulate on a particular job site also tend to fall in specific categories.
There are costs for space and structures, including temporary office structures, such as trailers,
architect's quarters and leased office space.

Project-specific salaries for foremen, schedulers, engineers and job superintendents form a
second substantial category for direct expenses. Thirdly, equipment costs add up quickly,
including job-specific equipment rentals, such as jackhammers, cranes, bulldozers and
backhoes. There are numerous other site costs as well, such as temporary utilities – the
sanitation facilities and drinking water necessary for any job site – that are also filed under
direct expenses.

Construction Overhead: How to Keep Costs Low

One of the biggest components of successful construction companies is effective budgeting. Overhead
costs can become less of a liability when well-managed.
This guide demonstrates where a company's spending can go awry and provides valuable insight on ways to
reduce costs and still maintain a high level of standards in your business. It goes into the who, what, how,
when, and why of matters so you can get a clear picture of where your money is going and how you can gain
better control of your spending.

Direct and Indirect Costs

There are two types of construction overhead costs that you'll be responsible for with any project
requiring construction management. The first is direct costs. The second is indirect costs.

Direct costs deal with the construction project you're currently working on. Indirect costs are ones that are
needed to keep the company running such as accounting services, marketing, legal fees, and travel expenses.
Without the indirect expenses, it’s very difficult for contractors to land contracts and work on projects.

Eight Construction Overhead Costs You Need to Be Aware

Of
There are eight different areas where construction overhead costs require your attention and they are:

1. Labor
The people that you hire to get the job done contribute to your construction overhead costs. Having a
workforce that runs like a well-oiled machine can improve the quality of your projects and help you complete
them according to your time budget. Using a time tracking software to track employee time reduces human
error, holds employees accountable, and eliminates labor disputes.

2. Supplies, Materials, and Equipment

All supplies, materials, and equipment for a job must be priced out so that you don't go over budget. Knowing
the cost of these items prior to starting a project allows you to account for them whenever calculating a bid to
submit to a client. Finding vendors and suppliers that offer deep discounts helps you get what you need for
less.

3. Onsite Facilities
These temporary trailers enable foreman and site managers to do their job. Like your permanent office
location, there is rent to pay, utility costs to account for, internet services required, equipment needed, and
housekeeping services required to get each specific job done on time and according to budget. The people
you put in charge of a construction site must be able to do their job to the best of their abilities - which is
possible thanks to the addition of onsite facilities. In some cases, buying your own travel trailer and
transporting it to the job site makes sense economically.
4. Vendor Fees
If you use companies outside of your own for any reason, you'll need to pay them for their products and
services. Keeping track of invoices so you can account for the construction overhead expenses is essential.
Paying vendors on time can prevent late fees, interest, and legal issues to maximize profits.

5. Travel Expenses
The costs to travel to long-distance work locations make up this category of expense. It could include gas and
mileage, meals for foremen and site managers, and even lodging if they're required to stay overnight to get
the job done. If owning company vehicles makes sense, the cost of buying or leasing them as well as
maintaining and repairing them also could fall under travel expenses. Keeping close watch over these fees is
easy when you use online expense reporting software versus traditional paper expense reporting methods to
keep track of construction overhead.

6. Financial and Legal Services

You'll need an accountant and lawyer to handle your finances and legal affairs. It's well worth the expense to
know that you're working within the confines of the law and getting the tax breaks that your company needs
to remain competitive in the construction industry. These indirect costs are a mainstay because you'll likely
pay a fee to have access to them year-round whether they're needed or not. Some professionals charge by
the hour while others charge a monthly fee to have unlimited access to them which is often the better deal.

7. Office Expenses
This includes rent, utilities, internet services, hardware, software, and housekeeping costs. Whatever it takes to
run your company from its central location is key. These costs are fixed because they're paid on a regular
basis. Investing in cost-effective solutions such as multi-functional electronic devices and software suites
reduce office expenses which impact construction overhead.

8. Advertising and Marketing

An often overlooked and underutilized area of construction overhead spending, it's what makes your
company stand out from the rest. When an advertising budget is spent correctly, itcan bring in more business,
making it a wise investment in your company's financial future. Routinely evaluating the effectiveness of your
advertising and marketing efforts in comparison to their costs allows you to make adjustments to your budget
as needed.

Now you know what could drain your bank account fast as the owner of a construction company. Getting a
handle on construction overhead costs allows you to take charge of your business' future and increases its
sustainability in the industry. Building a scalable company requires a great deal of profitability which is best
achieved by gaining new clients and keeping overhead costs minimal.

Overhead costs in construction can include:

• Rent for office space and other facilities

 • Benefits and salaries of full-time employees
• Insurance coverage for both people and equipment
• General liability coverage
• Transportation costs
• Labor hours
• Utilities like electricity, gas, and water
• Government fees and licenses
• Taxes on property, land, or other assets
• Depreciation costs
• Other job costs

Overheads

In accounting, the term ‘overheads’ refers to expenses that are paid by an organisation on an ongoing
basis. Overheads can be fixed (i.e. the same each month) such as rent on office buildings, or variable (i.e. fluctuating
depending on business activities) such as delivery costs. Overheads can also be semi-variable, where part of the
expense is incurred at a fixed level and another part fluctuates, such as utility charges.

In construction contracts, overheads are often priced proportionately against a project and are the calculated costs of
running the company contracted to carry out a project. Often these costs are described
as head office administrative costs (in some cases there may also be factory or manufacturing overheads).

Head office costs might include; property costs, finance charges on loans, insurances, staff, taxes, external
advisors, marketing and tendering activities and so on. Most contracting organisations will calculate a percentage
against project costs to be set against each project somewhere between 2.5% and 5% to cover head office services.

Site overheads such as site accommodation, insurance, and so on, are generally accounted for separately and
in contractual terms are included in the preliminaries element of the contract.

On prime cost contracts the contractor is paid for carrying out the works based on the prime cost (the
actual cost of labour, plant and materials) and a fee for overheads and profit. This fee can be agreed by negotiation or
by competition, and may be a lump sum (which it may be possible to adjust if the actual cost is different from
the estimate), or a percentage of the prime cost (which it may be possible to revise if the client changes the nature of
the works).
 d. Day Work, Task Work, Piece work,
Dayworks in construction

Daywork is a means by which a contractor is paid for specifically instructed work on the basis of
the cost of labour, materials and plant plus a mark up for overheads and profit. It is generally used when work cannot
be priced in the normal way.

NRM2, RICS new rules of measurement, Detailed measurement for building work defines daywork as; '... the method
of valuing work on the basis of time spent by the contractor’s workpeople, the materials used and the plant employed.'

Examples of when daywork may be applied are when unforeseen obstructions are encountered
during ground works or when work is instructed for which there are no comparative rates in a bill of quantities.

It is usual for most contracts to contain clauses that provide a method of evaluating variations,
additional work and instructions by using existing contract rates and prices. NEC contracts favour pre-agreed sums
based on acceptance of a contractor’s quotation.

There are two basic options as to how daywork rates can be priced:

Option A – a percentage addition

 Prime cost to which a percentage is added for overheads, profit and incidental costs.

Option B – all inclusive rates

 All inclusive rates are quoted at tender and incorporated in the contract documents. These include an
allowance for overheads and profit, either fixed for the period of the contract, or, in the case of contract
conditions that are index linked, subject to an inflation allowance.

What Is a Day Rate?

A day rate is the billing cost for an individual's services for a single day. It is sometimes called
a per diem.

Some purchasing organizations prefer to receive a quoted day rate instead of an hourly rate for
services.

Understanding the Day Rate

Day rates are common in industries in which workers are employed on a per-project basis or for
seasonal work, such as the oil and gas industry and construction.

Lore Law, a legal firm that specializes in representing workers in overtime wage and law claims,
indicates that day rate payment is common for workers classified as field specialists, field
operators, pipeline inspectors, top drive technicians, service supervisors, field coordinators, tool
pushers, pumpers, lease operators, mud engineers, field engineers, and water truck drivers.

Day rates also are becoming common among white-collar professionals who work on a freelance
or occasional basis rather than as regular salaried employees.
KEY TAKEAWAYS

• The day rate, or per diem, is a flat fee charged for a single day of an individual's
work.
• Day rates are common in industries which employ workers on a per-project or
seasonal basis.
• Day rates also have become common among consultants who work on a freelance
basis.
Workers who are employed on a day rate basis generally do not receive benefits from the
company whose work they perform, though some are given benefits by a third-party contractor
who is their actual employer.

Special Considerations
A day rate is usually based on an eight-hour workday.

A worker who is paid a day rate is entitled by law to time-and-a-half for work beyond a 40-
hour week.

In the U.S., a company paying a day rate is required to pay overtime if the individual works more
than 40 hours a week. The U.S. Department of Labor has cracked down on oil and gas and
construction companies that hired workers for day rates but required them to work overtime
without additional pay.

An employee who works at a day rate is entitled to an overtime rate of one and a half times the
hourly rate, based on the actual number of hours worked.

Setting a Day Rate

MMO Freelance, a web-based company search agency for freelance consultants, suggests that
workers who charge a day rate base it upon the rate they were paid at their most recent full-time
jobs. From there, it advises adding on the cost that the individual will pay for benefits that are
typically available to employees, such as health insurance and 401(k) contributions. The site
estimates that this can add between 50% and 150% to a day rate.

In addition, a day rate contractor may charge a premium for jobs that require highly specialized
skills. Such contractors often have at least two day rates, one for specialist jobs and a second,
lower, rate for more routine work.

Piece work
Piece work (or piecework) is any type of employment in which a worker is paid a fixed piece
rate for each unit produced or action performed,[1] regardless of time.
In the construction industry, it is common for companies to pay their "non-exempt" (i.e., hourly)
workers on a “piece rate” (i.e., measurable work completed) instead of by the hour. The purpose
of this method of compensation, which is perfectly legal if properly executed and documented, is
to motivate employees to heighten their productivity beyond what a mere hourly wage would
yield.

Piece work is well-suited to industries such as construction, manufacturing, transportation, etc. –

virtually any type of business where the work content can be predicted. Piece-based
compensation is attractive because it can benefit both the worker and the employer: The worker
has the opportunity to increase their income in return for extraordinary productivity; meanwhile,
the employer can more accurately tie labor costs to output and capacity (e.g., slabs poured, roofs
completed, sinks installed, houses built), and tie budgeted labor costs to what is actually paid out.

Unfortunately for many contractors and subcontractors, in the fall of 2011 the U.S. Department of
Labor’s Wage & Hour Division decided to investigate major homebuilders, and the companies
with which they contract, to root out suspected minimum wage and overtime violations. This
summer, Wage & Hour officials announced locally that electrical contractors are among the
industry groups that the Labor Department is targeting for investigation of "rampant" violations.
The trickle-down effect of the government’s investigation has exposed poor record-keeping and
payment practices of many members of the construction industry, resulting in substantial
assessments and penalties related to payment for piece work.

Where many construction companies and other payers of piece-based compensation get in
trouble is that they neglect to record and observe actual hours worked, which can put them
squarely at odds with the Fair Labor Standards Act (FLSA). Piece rates require legitimately
keeping “two sets of books”: one set that records hours worked, the other set that records work
completed. Reconciling those sets of records with actual compensation paid allows you to
demonstrate to workers and government agencies that, while you paid by the task, the amount
paid complied with minimum wage and overtime requirements.

CONSEQUENCES

Failure to keep track of worker hours and to pay them according to the rules leaves you open
(and largely defenseless) to worker claims that you did not pay them (a) the minimum wage, (b)
overtime or (c) both. Those claims will likely spark an audit by an investigator from the Wage &
Hour Division, an experience that leaves many employers yearning for the peace and tranquility
of an IRS examination.
While your first reaction to learning that one of your workers has reported you to the Department
of Labor is to seek vengeance on them, please note the folly of that course of action: If you fire or
otherwise willfully discriminate against an employee for filing an FLSA complaint or for
participating in a legal proceeding against you, you are subject to criminal prosecution, a first-
offense fine of up to $10,000, and imprisonment for repeat offenses.

That would be in addition to civil penalties of up to $1,100 – per violation – for willfully or
repeatedly violating the minimum wage or overtime pay requirements, and in addition to liability
for back wages.

If that doesn’t seem sufficiently harsh, any undeposited payroll taxes that are associated with the
back wages are subject to further penalties and interest, and any employee of your company who
could have deposited those payroll taxes can be held personally liable for them.

More on that: When you pay an employee – whether salary, hourly wage or piece rate – and
withhold taxes from their paycheck, you become a trustee for the federal government. Withheld
payroll taxes are called “trust fund taxes” and, in the eyes of the IRS, belong to the government.
When you fail to pay withheld payroll taxes to the government, IRC Section 6672(a) imposes a
penalty equal to the entire amount of the trust fund taxes on every “responsible person” who
“willfully” fails to see that the taxes are paid. The IRS can assess the penalty against any or all
responsible persons, without first trying to collect from the company.

PAYING FOR PIECE WORK THE RIGHT WAY

If, at this point in your reading, you have decided to recommit to doing things right, you are
probably more receptive than you were a few minutes ago to a few practical pointers.

On its website, the Wage & Hour Division offers some insight into paying workers on a piece rate,
which is defined as the “regular rate of pay for an employee paid on a piece work basis ...
obtained by dividing the total weekly earnings by the total number of hours worked in that week.”

Our Wage & Hour friends use this example: One of your workers, who is paid on a piece work
basis, earns $675 in a particular week. In that week, he worked 45 hours. The regular rate of pay
for that week equals $15 ($675 divided by 45 hours). In addition to the straight-time pay, the
worker is entitled to $7.50 (half the regular rate) for each hour worked over 40 – an additional
$37.50 for the five overtime hours – for a total of $712.50. While the temptation may be great to
“adjust” the number of hours worked to get your worker back down to a gross pay of $675, don’t
do it. For employees subject to minimum wage and overtime, hours worked are hours worked.

The Wage & Hour Division offers this alternative method of complying with overtime rules while
paying by the “piece”: If you and your worker agree to this arrangement before the work is
performed, you may pay 1.5 times the piece rate for each piece produced during the overtime
hours. The piece rate must be the one actually paid during non-overtime hours and must be
enough to yield at least the minimum wage per hour.

The recurring theme here is that you must keep track of the worker’s hours. The FLSA requires
that you retain for two years "records on which wage computations are based.” This includes time
cards, piece work tickets, wage rate tables, work and time schedules, and records of additions to
or deductions from wages." However, for purposes of satisfying the Department of Labor, payroll
registers should be kept for a minimum of three years.

Remaining vigilant about keeping accurate time records and using approved methods to calculate
wages will allow you and your workers to realize the benefits of piece work, while staying out of
the cross-hairs of Wage & Hour Division investigators.
Task Work or Out-TurnWork
Task Work or Out-Turn
Civil Construction Planning: Defining Work Tasks
 At the same time that the choice of technology and general method are considered, a
parallel step in the planning process is to define the various work tasks that must be
accomplished. These work tasks represent the necessary framework to permit scheduling of
construction activities, along with estimating the resources required by the individual work
tasks, and any necessary precedence or required sequence among the tasks. The terms work
"tasks" or "activities" are often used interchangeably in construction plans to refer to specific,
defined items of work. In job shop or manufacturing terminology, a project would be called
a "job" and an activity called an "operation", but the sense of the terms is equivalent. The
scheduling problem is to determine an appropriate set of activity start time, resource
allocations and completion times that will result in completion of the project in a timely and
efficient fashion. Construction planning is the necessary fore-runner to scheduling. In this
planning, defining work tasks, technology and construction method is typically done either
simultaneously or in a series of iterations.

The definition of appropriate work tasks can be a laborious and tedious process, yet it
represents the necessary information for application of formal scheduling procedures. Since
construction projects can involve thousands of individual work tasks, this definition phase
can also be expensive and time consuming. Fortunately, many tasks may be repeated in
different parts of the facility or past facility construction plans can be used as general models
for new projects. For example, the tasks involved in the construction of a building floor may
be repeated with only minor differences for each of the floors in the building. Also, standard
definitions and nomenclatures for most tasks exist. As a result, the individual planner defining
work tasks does not have to approach each facet of the project entirely from scratch.

While repetition of activities in different locations or reproduction of activities from

past projects reduces the work involved, there are very few computer aids for the process of
defining activities. Databases and information systems can assist in the storage and recall of
the activities associated with past projects as described in Chapter 5. For the scheduling
process itself, numerous computer programs are available. But for the important task of
defining activities, reliance on the skill, judgment and experience of the construction planner
is likely to continue.

More formally, an activity is any subdivision of project tasks. The set of activities
defined for a project should be comprehensive or completely exhaustive so that all necessary
work tasks are included in one or more activities. Typically, each design element in the
planned facility will have one or more associated project activities. Execution of an activity
requires time and resources, including manpower and equipment, as described in the next
section. The time required to perform an activity is called the duration of the activity. The
beginning and the end of activities are signposts or milestones, indicating the progress of the
project. Occasionally, it is useful to define activities which have no duration to mark
important events. For example, receipt of equipment on the construction site may be defined
as an activity since other activities would depend upon the equipment availability and the
project manager might appreciate formal notice of the arrival. Similarly, receipt of regulatory
approvals would also be specially marked in the project plan.

The extent of work involved in any one activity can vary tremendously in construction
project plans. Indeed, it is common to begin with fairly coarse definitions of activities and
then to further sub-divide tasks as the plan becomes better defined. As a result, the definition
of activities evolves during the preparation of the plan. A result of this process is a natural
hierarchy of activities with large, abstract functional activities repeatedly sub-divided into
more and more specific sub-tasks. For example, the problem of placing concrete on site would
have sub-activities associated with placing forms, installing reinforcing steel, pouring
concrete, finishing the concrete, removing forms and others. Even more specifically, sub-
tasks such as removal and cleaning of forms after concrete placement can be defined. Even
further, the sub-task "clean concrete forms" could be subdivided into the various operations:

z Transport forms from on-site storage and unload onto the cleaning station. z Position
forms on the cleaning station.

z Wash forms with water.

z Clean concrete debris from the form's surface.
z Coat the form surface with an oil release agent for the next use.
z Unload the form from the cleaning station and transport to the storage location.

This detailed task breakdown of the activity "clean concrete forms" would not generally be
done in standard construction planning, but it is essential in the process of programming or
designing a robot to undertake this activity since the various specific tasks must be well
defined for a robot implementation.

It is generally advantageous to introduce an explicit hierarchy of work activities for the

purpose of simplifying the presentation and development of a schedule. For example, the
initial plan might define a single activity associated with "site clearance." Later, this single
activity might be sub-divided into "re-locating utilities," "removing vegetation," "grading",
etc. However, these activities could continue to be identified as sub-activities under the
general activity of "site clearance." This hierarchical structure also facilitates the preparation
of summary charts and reports in which detailed operations are combined into aggregate or
"super"-activities.

More formally, a hierarchical approach to work task definition decomposes the work
activity into component parts in the form of a tree. Higher levels in the tree represent decision
nodes or summary activities, while branches in the tree lead to smaller components and work
activities. A variety of constraints among the various nodes may be defined or imposed,
including precedence relationships among different tasks as defined below. Technology
choices may be decomposed to decisions made at particular nodes in the tree. For example,
choices on plumbing technology might be made without reference to choices for other
functional activities.

Of course, numerous different activity hierarchies can be defined for each construction
plan. For example, upper level activities might be related to facility components such as
foundation elements, and then lower level activity divisions into the required construction
operations might be made. Alternatively, upper level divisions might represent general types
of activities such as electrical work, while lower work divisions represent the application of
these operations to specific facility components. As a third alternative, initial divisions might
represent different spatial locations in the planned facility. The choice of a hierarchy depends
upon the desired scheme for summarizing work information and on the convenience of the
planner. In computerized databases, multiple hierarchies can be stored so that different
aggregations or views of the work breakdown structure can be obtained.

The number and detail of the activities in a construction plan is a matter of judgment or
convention. Construction plans can easily range between less than a hundred to many
thousand defined tasks, depending on the planner's decisions and the scope of the project. If
subdivided activities are too refined, the size of the network becomes unwieldy and the cost
of planning excessive. Sub-division yields no benefit if reasonably accurate estimates of
activity durations and the required resources cannot be made at the detailed work breakdown
level. On the other hand, if the specified activities are too coarse, it is impossible to develop
realistic schedules and details of resource requirements during the project. More detailed task
definitions permit better control and more realistic scheduling. It is useful to define separate
work tasks for:

z those activities which involve different resources, or

z those activities which do not require continuous performance.

For example, the activity "prepare and check shop drawings" should be divided into a task
for preparation and a task for checking since different individuals are involved in the two
tasks and there may be a time lag between preparation and checking.

In practice, the proper level of detail will depend upon the size, importance and difficulty
of the project as well as the specific scheduling and accounting procedures which are adopted.
However, it is generally the case that most schedules are prepared with too little detail than
too much. It is important to keep in mind that task definition will serve as the basis for
scheduling, for communicating the construction plan and for construction monitoring.
Completion of tasks will also often serve as a basis for progress payments from the owner.
Thus, more detailed task definitions can be quite useful. But more detailed task breakdowns
are only valuable to the extent that the resources required, durations and activity relationships
are realistically estimated for each activity. Providing detailed work task breakdowns is not
helpful without a commensurate effort to provide realistic resource requirement estimates. As
more powerful, computer-based scheduling and monitoring procedures are introduced, the
ease of defining and manipulating tasks will increase, and the number of work tasks can
reasonably be expected to expand.

Example 1-3: Task Definition for a Road Building Project

As an example of construction planning, suppose that we wish to develop a plan for a

road construction project including two culverts. Initially, we divide project activities into
three categories as shown in Figure 1-2: structures, roadway, and general. This division
is based on the major types of design elements to be constructed. Within the roadway
work, a further sub-division is into earthwork and pavement. Within these subdivisions,
we identify clearing, excavation, filling and finishing (including seeding and sodding)
associated with earthwork, and we define watering, compaction and paving sub-activities
associated with pavement. Finally, we note that the roadway segment is fairly long, and
so individual activities can be defined for different physical segments along the roadway
path. In Figure 9-2, we divide each paving and earthwork activity into activities specific
to each of two roadway segments. For the culvert construction, we define the sub-
divisions of structural excavation, concreting, and reinforcing. Even more specifically,
structural excavation is divided into excavation itself and the required backfill and
compaction. Similarly, concreting is divided into placing concrete forms, pouring
concrete, stripping forms, and curing the concrete. As a final step in the structural
planning, detailed activities are defined for reinforcing each of the two culverts. General
work activities are defined for move in, general supervision, and clean up. As a result of
this planning, over thirty different detailed activities have been defined.

At the option of the planner, additional activities might also be defined for this project.
For example, materials ordering or lane striping might be included as separate activities.
It might also be the case that a planner would define a different hierarchy of work
breakdowns than that shown in Figure 9-2. For example, placing reinforcing might have
been a sub-activity under concreting for culverts. One reason for separating reinforcement
placement might be to emphasize the different material and resources required for this
activity. Also, the division into separate roadway segments and culverts might have been
introduced early in the hierarchy. With all these potential differences, the important aspect
is to insure that all necessary activities are included somewhere in the final plan.
Labor Requirement for Various Construction Works
There are different types of labors that are required for the construction:

• Skilled labor
• Semi-skilled labor
• Unskilled labor
All these types of labors have different skills and different salaries. Their optimum use in
every work in construction is essential to minimize the construction cost.

The table below shows the recommended labor requirement for various civil
engineering/building/construction works:
S.
Recommended
Description of work Unit Labor
constant in days.

No.

Mate 0.06
Excavation over areas (hard/dense soil),depth up
1) M3
to 1.5m and removal (up to one meter from edge)

Labor 0.62

Excavation in trenches (soft/ loose soil),for Mate 0.05

foundations not exceeding 1.5m in width and for
2) shafts, wells, cesspits and the like, not exceeding M3
10m3 and on plan, depth up to 1.5m and
removal(up to one meter away from edge)
Labor 0.50

Mate 0.02

Returning, filling and ramming of excavated

earth in layers not exceeding 20 cm in depth,
3) M3
watering, well ramming and leveling, lead up to
50m Labor 0.25

Bhisti 0.02

Labor 0.50
Concrete :
4) M3

Bhisti 0.10
 Mixing by machine (mixer) at banker, cement Mixer 0.07
concrete (with 20mm graded coarse operator
0.07
aggregate)
Mixer

mason
0.10

Labor
1.63

bhisti
5) Mixer mixed cement concrete M3 0.70

mixer
0.07
operator

0.07
mixer

0.07
vibrator

mason
0.17

Labor
Reinforced cement concrete in situ in 2.00
foundations, footings, bases for columns, etc
excluding form work and reinforcement. (The bhisti
6)
constants for items include mixing, pouring,
M3 0.90
consolidating and curing. This does not include fair mixer
finish.) 0.07
operator

0.07
mixer

0.07
vibrator

mason 0.24
Reinforced cement concrete in situ in suspended
7) floors/roofs excluding form work, and M3
reinforcement.
Labor 2.50
 bhisti 0.90

mixer 0.07
operator
0.07
mixer
0.07
vibrator

Mortars:
Labor 0.75
Mixing by hand, cement mortar of any
8) mix/proportions (Labor required will be M3

approximately same for different mix

Bhisti 0.07
proportions.)

mason 0.94
Brick work (straight walls):

9) Brick work in walls exceeding one brick thick, M3

in cement / lime mortar (The constants Labor 1.80
include labor involved in scaffolding.)
bhisti 0.20

mason 0.25

Brick work in walls, one brick thick, in cement/lime

10) mortar. (The constants could be adopted for brick M2
work with any mix or mortar.) Labor 0.40

bhisti 0.10

Formwork / Shuttering: Carpenter 0.25

M3
a) fabrication and erection with all supports,
struts, braces, etc, and dressing with oil as
11)
cleaning of formwork: Labor 0.20
M2

1) rectangular column and walls M2 Carpenter 0.23

 2) suspended floors/roofs Labor 0.20

3) sides and soffits of beam Carpenter 0.30

Labor 0.20

Reinforcement:

Bar reinforcement including cutting to length, Bar bender 1.00

12) hooked ends, cranking or bending, hoisting Quintal

and placing in any position, binding wire and
holding firmly so as not to be disturbed while Labor 1.00

placing and ramming of concrete

mason 0.08

Labor 0.10
Plastering and pointing:

a) 15mm thick cement plaster to ceiling bhisti 0.10

M2
including mixing of mortar.
mason 0.06
13)
b) 15mm thick cement plaster on brick walls
Labor 0.10
(exterior) including mixing of mortar M2
M2
bhisti 0.10
c) Tuck pointing to random rubble masonry
in cement mortar including mixing mortar. mason 0.10

Labor 0.15

bhisti 0.10

Mason 0.10
Damping proof course:

14) a) Laying damp proof course 40mm thick M3

cement concrete including form work and fair Labor 0.10
finishing to edges and mixing.
bhisti 0.01
Note: Bhisti means water carrier.
Unit IId - INDENT OF MATERIALS (Calculation of Materials)
1. cement, sand, and water for concrete.
During the construction works, you have to calculate materials required for preparing the concrete.
In this article, we will discuss the calculation process to find the exact volume of materials required
to prepare specific concrete of different grades.
The calculation depends upon the mix ratio of concrete materials.
Here is the table for concrete grade with the mix-ratio of materials.

calculate the quantity of materials for 1 m³ volume of concrete.

The mix of cement, sand, and aggregate is done according to the grades of concrete.
Depending upon the nature of work and requirements, the selection of the different
grades of concrete is done.
Let we take here M20 grade of concrete which means a mixture of cement, sand, and
aggregate in the portion of 1: 2: 4
Before going to the calculation process, a few points you need to know,
1. Dry volume of concrete material is 50-55% more.
2. Density of cement = 1440 kg/cum
3. The standard weight of 1 KG cement bag is 50Kg.
4. Water cement ratio is taken 0.45.
5. 1 m³ water = 1000 Litres
Let the wet volume of concrete = 1 m³
And, the dry volume of concrete (v) = 1 × 1.54 = 1.54 m³
Note: We need to take around 50-55% more materials (cement, sand, and aggregate ) in
dry form so that after the mixture of materials with water the compacted volume will be
less.
Here we take M20 grade of concrete so the mix ratio of cement, sand, and aggregate
for M20 is 1:2:4 (a:b:c)
Calculation Process For Cement Concrete
Here we have total dry volume (V) = 1.54m³
Since, the mix ratio of concrete is 1:2:4, which means a mixture of 1 portion of cement, 2
portions of sand and 4 portion aggregates by volume.
So, the addition of total mix ratio= 1+2+4 = 7
Calculation to find quantity of Cement in concrete
Total volume of Cement = (Volume of dry concrete / total mix ratio) × portion of cement in
concrete
= (1.54/7) x 1
= 0.22 m³
As mentioned above in the article, the density of cement = 1440 kg/m³ and weight of a
bag of cement is 50kg.
∴ Weight of cement = density x volume = 0.22 x 1440 = 316.8 kg
∴ No. of total cement bags required = 316.8 / 50 = 6.33 bags.
Calculation to find quantity of Sand in concrete
For finding the volume of Aggregates used in concrete, we will use the following
formulae.
The Volume of Sand = (Total dry volume of concrete/ total mix ratio) × portion of sand in
concrete
= (1.54/7) x 2 = 0.44 m³
Calculation to find quantity of Aggregates in concrete
To find the quantity of Aggregates used in concrete, we will use the following
formulae.
Volume of Aggregates = (Total dry volume of concrete/ total mix ratio) × portion of
aggregates in concrete
= (1.54 / 7) x 4 = 0.88 m³
Calculation to find the volume of Water required
According to the IS code for concrete, the standard water/cement ratio is 0.45.
So, w/c = 0.45
∴Required water for 0.22 m³ cement = 0.22 x 0.45 = 0.099 m³
As we know, 1 m³ of water = 1000 Litres
∴ Required water in liter = 0.099 x 1000 = 99 liters.In this way we find out the quantity of
materials required for the 1m³ concrete.
 2. Quantity and Rate Analysis for Reinforced Concrete
Construction
1. Estimation of materials:
Material estimation include sand, cement, coarse aggregate and steel for a particular mix design.
Let us consider a mix design of 1:1.5:3 for our estimation practice. The dry volume of total
materials required is considered as 1.54 times the wet volume of concrete, due to voids present
in sand and aggregates in dry stage. Therefore, for our calculation, we will consider the total
volume of materials required as 1.54 m3 for 1 m3 of wet concrete.
a) Bags of cement required:
Volume of cement required for 1m3 of Concrete =

Then number of bags of cement (volume of one bag of cement = 0.0347 m3)

b) Volume of Sand required:

c) Volume of Coarse Aggregate Required

d) Estimation of Reinforced Steel:

Quantity of steel required depends on components of structure, i.e. slabs, beams, columns,
foundations, roads etc. To estimate the steel required, there are two methods.
First method is, when we have the drawing available, we can calculate the total weight of steel
required divided by total volume of concrete for different components. This will give us the weight
of reinforcement steel per cubic meter of concrete.
Second method is assuming the percentage of reinforcement for different components. Following
are the percentage of reinforcement steel generally required per different components. Its values
can vary from structure to structure, and can be assumed from past experiences of similar
structure.

o For slabs = 1.0 % of concrete volume.

o For Beam = 2 % concrete volume.
o For column = 2.5 % of concrete volume.
o For RCC Roads, 0.6% concrete volume.
Lets take example of RCC Column, where reinforcement required is 2.5% of concrete volume,
weight of steel required will be:
3. Rate Analysis of Brick Masonry -Calculate Quantity and Cost
Rate analysis of brickwork requires the determination of quantities of materials (bricks and
mortar) and labours. Mortar can be of any proportions 1:2, 1:4, 1:6, 1:8 etc. Quantity
estimation for mortar is discussed here. The quantity estimation of bricks is required for the
rate analysis.
Quantity Estimation for Brick Masonry:
For the rate analysis of brick masonry, we will consider 1m3 of brick masonry.
1. Number of bricks for 1 cubic meter of brick masonry:
For 1m3 of brick masonry, the number of standard size of bricks required is 494.
2. Quantity of mortar for 1m3 of brick masonry:
For 1m3 of brickwork, the quantity of the mortar required is 25 – 30%, i.e. 0.25m3 –
0.3m3 of cement masonry. For this example, we will consider 0.3m3 of cement mortar.
We have already discussed how to calculate the quantity of materials, i.e. cement and
sand for mortar here.
Labour Estimation for Brick Masonry:
Labours that are required for brick masonry are mason for brick work, labours for carriage of
materials (sand, cement, bricks, and water), mixing and transporting mortar.
The quantity of labour is expressed as requirement of labour in days for 1m3 of brick masonry.
1. Mason: The quantity of mason required for 1m3 of brickwork is taken as 0.94 days.
2. Labour: The quantity of labour for various works like carriage of materials, mixing of mortar,
transporting of mortar etc. are clubbed. The labour required for 1m3 of brick masonry is for 1.57
days.
The cost of various tools, transportation of materials etc. shall be suitably taken as lumpsum for
the given location.
Rate Analysis of Brick Masonry:
Rate Analysis of brickwork now requires rates of various materials like cement, sand, bricks, and
rates for labour i.e. mason and other labours. The rates of these varies with location and time.
These may be obtained from the schedule of rates of particular location or can be taken from
local market and shall be multiplied with the quantities of materials and labours we have
estimated to get the rate analysis.

4. Solution method for the material required for partition wall

Here, the breath or thickness of partition wall = 110 mm
Total area on which partition wall to be constructed = 100 m²
∴ Volume of Brick Work = 100 x 0.11 = 11m³
Cement mortar ratio = 1:4 (i.e 1 part of cement with 4 part of sand)
Now, the standard size of brick in India and Nepal = 230mm x 110mm x 55mm (May vary with
country to country)
Since, 10 mm mortar cover the brick while laying wall so,
nominal size of brick with mortar = 240mm x 120mm x 65mm = (0.24*0.12*0.065)m³
no. of brick required = 11 /(0.24*0.12*0.065)m³ = 6410.26 nearly = 6411 nos.
Always add 5% for wastage on Brick work = 1.05 x 6411 = 6732
Now, required volume of mortar = total volume – (no. x volume of brick)
={11 – 6411*(0.23*0.11*0.55)} = 2.08 m³
 Add 30% for the dry volume of mortar = 1.3 x 2.08 = 2.70m³
Portion of Mortar = 1+4 = 5
∴ Required volume of cement = 2.7 / 5 = 0.54 m³
Note: 1m³ of cement = 28.8 bags of cement
so, required bag of cements = 0.54 x 28.8 bags = 15.55 bags
∴ Required volume of sand = (2.7/5) x 4 = 2.16 m³
Taking W/C ratio = 0.8,
Required volume of water = (0.8 x 2.7/5)m³ =0.432 m³ = 432 liter
Note: 1m³ volume of water = 1000 liters
Calculation of Labour and their charges
In mostly case the required numbers of labour for specific work is mentioned.
For 100 m² partion wall work, we take following standard data:
Skilled Labour = 16 numbers
Skilled Labour Wages = Rs 750 each
Un-skilled Labours = 46 nos.
Un-Skilled Labour Wages = Rs.500 each

5. Calculate the Quantity of cement sand for plastering!!

calculation process to find out the quantity of cement sand for plastering.
In engineering practice, we take the following points as reference for plastering
work:
1. For wall plastering, Cement Mortar Ratio used is 1:6
2. For ceiling plastering, Cement Mortar Ratio used is 1:4
3. Thickness of plastering should not be more than 12 mm.
4. Cement & Sand should be mixed well.
To calculate the required quantity of Cement, Sand required for plastering we
need to have the following data:
1. Thickness of plaster
2. Mix-ratio of cement sand
3. Area to be plastered
Calculation process for finding the quantity of cement, sand, and water
for plastering
For a civil engineer or constructor, it is important to know the exact amount of cement,
sand required for plastering purposes before starting work.
Step 1:- Find out the Area to be plastered, thickness and mix ration of
cement sand.
• Area of Plaster = 100-meter square (Assumed)
• Thickness of plaster = 12 mm =0.012 m
• Mprtar Mix Ratio → 1:4
 Step 2:- Find out Volume to be Plastered
• Volume of plaster = Area of plaster x Thickness of plaster
• Volume of plaster = 100 x 0.012 = 1.2 m³
Add 15-20% extra Quantity for Filling of joints & Wastage.
• Volume of plaster = 1.2 + [ (1.2 x 15) /100 ] = 1.38m³
Since, Dry volume of materials is 53% more than wet volume so,
Dry Volume of material required for plaster = Wet volume x 1.53
• Dry Volume = 1.38 x 1.53 = 2.1114 m³
Step3:- To find Out the Quantity of Cement required for plastering
To find out the quantity of cement required for the plastering purpose it is calculated by:
Quantity of Cement = (Dry Volume of material required for plaster x Cement ratio) /
(Sum of the ratio)
• Quantity of cement = (2.1114 x 1) /(1+4)= 0.42228m³
We know that, the Density of Cement = 1440kg/m³
• Weight of Cement = 1440 x 0.42228 = 608.083 Kg
Since, 1 bag of cement contain 50 kg of cements.
• Number of bags = 608.083 Kg/50 = 12.161 No’s which is 13 bags.
Step 4:- To find out the Quantity of Sand required for plastering
Since, our cement and sand ratio is 1:4.
• Total Quantity of Sand required= Quantity of Cement x 4
• Total Quantity of Sand required= 0.42228 m³ x 4 = 1.68912 m³
Note: 1 m³=35.3147 Cubic Feet (CFT)
Total Quantity of sand = 1.68912 x 35.3147 = 59.65 CFT
We know that, the Density of sand = 1920 kg/m³
Weight of sand = 1.68912 x 1920 = 3243.11 kg
Step 5:- To find out the quantity of water required for cement sand
mixture
The Quantity of water equals to 20% Total Dry material (cement & sand)
Quantity of water = 0.20 x (Weight of cement + Weight of sand )
Therefore, Quantity of water = 0.20 x (608.083 + 3243.11 ) = 770.23 kg = 770.23 Liters
NOTE: 100 Square meter is a huge area just for calculation purpose we
assume that.
In this way, you can calculate the required quantity of cement sand for plastering the
walls, ceilings.