August 2024
When assembling construction bids, it’s easy to overlook overhead.
That complicates an already complex process and underestimates the resulting impact. Unaccounted-for or miscalculated costs can escalate rather quickly, potentially contributing to cost overruns. They can also have serious knock-on effects: distorting financial reporting, squeezing cash flow and compromising profit margins.
It’s more than just a detriment to bids; it makes it hard to grow the business.
As with project costs, overhead expenses must be itemized and managed effectively. The larger and more complicated the project, the more detailed those expenses should be to reflect the project’s actual cost.
Benefits of Effective Overhead Costs Management
Those details matter. Tracking and allocating all overhead costs—indirect expenses that keep the construction company’s lights on and project-specific direct expenses—is essential to truly understand their impact on the project and the business. Sure, managing overhead costs might seem a cumbersome process, but the benefits far outweigh the work and time investment.
Protecting Profit Margins. A healthy margin allows a company to put money back into it—not just to keep it going but to make improvements, pay down debt and expand operations.
Maintaining Cash Flow. Effective overhead costs management makes it easier to know where money is coming from and going. It ensures there are financial resources to cover ongoing business and project needs.
Boost Bid Competitiveness. Project owners increasingly value accurate, realistic bids rather than automatically deferring to the lowest bidder. Detailing overhead costs shows a strong understanding of the work scope, which can help secure contracts. This feeds the cycle of preserving margins and freeing up capital to invest in technologies and resources to give the company a competitive edge.
Promote Cost-consciousness. Responsibility for managing overhead costs rests with more than just the project managers and cost engineers. Engaging project teams and employees raises awareness of the importance of cost reduction and creates a shared mindset and commitment to optimizing operational expenses through improved efficiencies.
Strategies for Managing Overhead Costs
Lassoing control over indirect and direct overhead costs requires a proactive approach. Let’s look at some actionable strategies to consider implementing.
Technology Tools. One of the most effective ways to streamline the process is to use technology—but not familiar computer spreadsheet programs. Sizable capital projects require more accuracy and sophisticated functionalities than those programs can deliver.
The key is to leverage technology intended for the construction industry. Purpose-built, SaaS-based digital tools specializing in estimating, cost management, supply chain correspondence and building information modeling (BIM) have proven indispensable in managing and controlling overhead for companies with ever expanding portfolios.
SaaS-based construction management software is ideal for keeping costs low. The more robust ones include budgeting, forecasting, real-time expense tracking and resource allocation functionalities.
- It acts as a cost-tracking system, centralizing data and automating real-time monitoring, calculating and allocating indirect and direct expenses.
- Automation introduces efficiency by replacing time-consuming manual data entry and doing away with the inevitable errors that require even more time to find and fix.
- There are fewer hours needed to do administrative work.
- And there’s far less of a need for printing and storing paperwork.
As a 3D modeling process, BIM might not immediately come to mind as a way to control overhead. But think about it:
- If a picture is worth 1,000 words and a 3D model is worth 10,000, then a full BIM model is worth 1,000,000 with the level of insights and value it provides for planning and execution.
- BIM eliminates the work hours usually devoted to creating and updating drawings and the costs of their printing and delivery.
- It also corrects the design errors and clashes that would have eventually become rework. This alone helps reduce the overhead incurred from extended or additional equipment and facility rentals, staffing to manage a delayed project and disposal of replaced materials.
Both forms of technology act as collaborative tools for project teams and stakeholders, shortening review and approval processes and erasing the need for emails, phone calls and meetings—all of which are hard to pin down from a time-cost perspective.
Planning and Budgeting. Planning is the main building block for effective overhead costs management.
First, a solid understanding of the project requirements is a must—estimate accuracy comes from this. Historical data and industry benchmarks are tried-and-true sources for formulating a real-world estimate. Localizing and updating using current costs helps nail down a realistic estimate.
Focusing on overhead costs, what do those past details show about them? Knowing these costs can change over time, did they rise faster or more steeply than anticipated? Was extra outlay required for unanticipated major equipment repairs or business insurance rate increases, for example? Were contingency funds able to cover them? Were any overhead costs unnecessary?
The emerging details help forecast a baseline budget for overhead costs. Managing costs against this budget helps protect cash flow and profit margin.
Because planning is an ongoing process and overhead costs keep going up, incorporating regular reviews of the estimate and making updates helps project managers stay on top of factors that could impact those costs.
Procurement and Inventory Management
Procurement represents a substantial portion of a project’s budget, making cost-reduction opportunities a priority.
Ordering large quantities of materials to get bulk pricing can be great for keeping those costs low, but that could mean taking possession of that material all at once. This can then necessitate renting or building storage space to house the inventory, incurring overhead expenses. Plus, project scope or design changes can lead to excess inventory and removal costs.
One way to avoid this potentially costly scenario and reduce waste is to negotiate for vendor-managed inventory (VMI), in which the vendor assumes all administrative responsibility and maintains inventory. While this comes with a fee, there can be a greater productivity cost benefit in freeing up valuable staff time and effort for tasks that are more critical to the project.
Another is by employing a just-in-time (JIT) inventory strategy. Procuring only what’s needed when it’s needed can slash storage costs and minimize the potential for unusable material. Material usage must be monitored, so there’s enough lead time for reordering that accounts for any potential supply chain issues. Streamlining this process with construction management software offers real-time visibility into material usage.
Regular Monitoring and Reporting. Much of the discussion around overhead costs tends to center on how to calculate them rather than how to manage them effectively. This lack of focus can lead to misjudging or glossing over their impact on project costs, profitability and cash flow.
As with any other direct expenses, managing overhead costs requires continuous monitoring. This is a must-do proactive strategy. There’s no one-size-fits-all method to track or calculate them; the important thing is to do it.
That said, construction cost management software offers the most effective means to gain real-time visibility into overhead cost behavior. It’s a bit more involved than that, though. Overhead cost data still needs a bit of interpretation before corrective action is taken. Leveraging the software’s dashboards and configurable reports, overhead KPIs, trends and irregularities are converted into digestible visual formats, making analysis far more straightforward. Project managers are empowered to determine where and how to make adjustments that better allocate or save overhead costs and protect profitability.
Taking Steps Toward Overhead Costs Management
While direct and indirect overhead costs are understood, their impact on project outcomes is often overlooked. Even though these expenses don’t contribute to the bottom line, not proactively managing them jeopardizes it. By bringing overhead costs out of the shadows and implementing strategies to enhance their visibility and control, construction companies can improve bid accuracy, mitigate financial risk and ultimately strengthen their bottom line.
Contruent supports overhead costs management strategies with its robust project management software. Find out more about how our solutions can help you gain control over all your project costs. Contact us or request a demo today.