Course : CE PRO 3

Topic : Subcontractor Cost and Project Overhead Cost

Presenter/Reporter : Chester Brian R. Lamayo and Clarissa Jane V. Leal
Instructor : Dr. Dioscoro Y. Mancao Jr.

SUBCONTRACTOR COST AND PROJECT OVERHEAD COST

Clarissa, put your notes here above mine!!

What Is Overhead Cost?

Overhead costs refer to all indirect expenses of running a business. These
ongoing payments support your business but are not directly linked to creating a
product or service.
It is important to research overhead for budgeting and determine how much
the business should charge for a service or product to make a profit. For example, if
you have a service-based business, then apart from the direct costs of providing the
service, you will also incur overhead costs such as rent, utilities, shipping costs, and
insurance.

What is Overhead in construction?

Overhead is the cost of running a business. In construction, overhead
includes both direct costs, which are tied to specific jobs, and indirect costs, which
include operational costs required to run a business.
Some examples of direct costs would include equipment rental or temporary office
structures.
Examples of Indirect costs include salaries and benefits for office staff, rent
for a building, marketing and advertising costs, legal fees, and more.
Overhead costs represent funds that a construction business needs to
operate. For that reason, well-crafted construction bids will not only cover the cost of
labor and materials, but also the overhead required for keeping the business going. A
strong bid should also include a margin for profit, which will enable a business to
reinvest in itself and continue to grow.

Types of Overhead Costs

Fixed Overhead
These costs remain constant regardless of production and business profit, like
administrative costs, insurance costs, or rent.
Course : CE PRO 3
Topic : Subcontractor Cost and Project Overhead Cost
Presenter/Reporter : Chester Brian R. Lamayo and Clarissa Jane V. Leal
Instructor : Dr. Dioscoro Y. Mancao Jr.
Variable Overhead
These variable costs change depending on the production volume or the
number of services you provide. This may include gas for an oven, maintenance on
your vehicles, and shipping or utility costs like heat and water that vary depending on
how much you use them.

Semi-Variable Overhead
This includes semi-variable cost items like sales commissions on top of staff
salaries or phone service with additional roaming charges added due to travel for
work. Any bills or costs may start at a predictable base amount but vary if use is
high.

Construction Overhead and Markup

To calculate your construction overhead, add up the monthly fixed costs of running
your business. Some find it easier to add up your annual costs, and then divide by
12 to get your monthly expenses. The resulting figure is the amount of money you
must make each month to keep your business alive.
Typical overhead costs include:
 Executive and administrative  Occupancy and utility bills
payroll  Telephone and technology
 Employee taxes and benefits  Vehicle expenses
 Insurance  Tools and equipment
 Professional fees such as  Legal and marketing
marketing and accounting  Other office expenses
Overhead does not include any direct project costs, such as materials or
payroll for field teams or other labor. That’s because you’ll only have those
costs if you have work to do.
Once monthly overhead is calculated, you can determine your markup. Markup is a
percentage to add onto project estimates to cover overhead and keep your projects
profitable.
Two Methods to calculate Markup
1. By labor cost
To calculate your construction overhead by labor cost, divide your monthly
overhead by your monthly labor costs. This figure tells you how much of each
dollar goes toward overhead.
Overhead costs
Overhead Markup , %= ×100
Labor Costs
Course : CE PRO 3
Topic : Subcontractor Cost and Project Overhead Cost
Presenter/Reporter : Chester Brian R. Lamayo and Clarissa Jane V. Leal
Instructor : Dr. Dioscoro Y. Mancao Jr.
Example 1:
You have monthly overhead costs of ₱30,000.00 (₱10,000.00 insurance +
₱10,000.00 utility bills + ₱10,000.00 office supplies) and you’re the only
employee. Let’s say you pay yourself ₱750/hour and work 40 hours/week
(₱120,000.00/month).

Solution:
₱ 30,000
× 100=25 % overhead markup
₱ 120,000
It means that for every peso you make, ₱ 0.25 goes straight to overhead.
If there’s have multiple employees, the overhead percentage will decrease because
it will be able to spread the overhead across more projects as it takes on more work.

There are now 3 full-time employees at ₱750/hour with 40 hours/week

₱ 30,000
× 100=8.33 % overhead markup
₱ 360,000
Since there have more crew members doing more work, it can afford to spread out
the overhead costs across more projects.

Example 2:
Let’s say your overhead costs are ₱15,000/month and you have 2 full-time
employees: yourself and someone else.
Solution:
₱ 15 , 000
(5,000 insurance+5,000 utility bills+5,000 office supplies )
×100=50 % overhead markup
₱ 30 , 000
( you pay your self ∧another ₱ 750/day )
With that calculation, you know you should be adding at least 50% to your labor
costs to cover overhead.
Now, say you get two renovation projects that’ll take around 2 days each.
Solution:
Project 1=2 days of work
× 50 %=₱ 750 overhead markup
Laborer cost=₱ 1,500( ₱ 750/day )
Course : CE PRO 3
Topic : Subcontractor Cost and Project Overhead Cost
Presenter/Reporter : Chester Brian R. Lamayo and Clarissa Jane V. Leal
Instructor : Dr. Dioscoro Y. Mancao Jr.
Using your calculation above, your total overhead markup will be ₱1,500 (since there
are two people) so that you at least break even on costs.

2. By Sales
Let’s say you have a full-time team that is paid the same amount every month,
but they do different amounts of billable work each month. In this case, you may
want to calculate your construction overhead by sales.
To calculate your overhead by total sales, divide your monthly overhead by your
average monthly sales. This figure is your overhead markup percentage, which
you add to a project estimate based on the cost of that project.

Monthly Overhead C osts

Overhead Markup , %= × 100
Average Monthly Sales
Example 1:
In this example, let’s say your overhead costs are ₱15,000/month (₱5,000
insurance + ₱5,000 utility bills + ₱5,000 office supplies). Your sales are ₱100,000
/month. Here’s how you’d calculate your overhead markup:
Solution:
₱ 15 , 000
×100=1 5 % overhead markup
₱ 1 0 0,000
That means if Project 1 will cost you ₱25,000, you need to add overhead markup of
₱3,750 (₱25,000 x 15%).

Calculating Overhead cost will give you a metric that is useful to track to measure
performance over time and to see if your fixed cost can stay the same while your
revenue grows, showing that you can increase profit by scaling and taking on more
projects.