Author: Zach Webber, CPA | Audit Supervisor | Construction & Real Estate Industry Team
If your construction contracting business is experiencing tightened margins, it may be because your estimators are excluding an important job labor cost when preparing estimates and submitting bids.
Contractors must consider indirect costs as well as direct costs when using the percentage of completion accounting method. Generally, contractors include all direct job costs, such as labor, materials, subcontractor costs, and equipment costs, when considering and estimating contract costs. However, there are additional labor-related charges that should be included in the job cost estimation.
Indirect costs that must be paid to field employees should be aggregated and added to direct labor costs and included in job costs. The burden rate is the dollar amount of overhead that is applied to one dollar of wages. The labor burden cost pool can include:
- State and federal payroll taxes
- Vacation/Paid time off
- Employee benefits, such as health, life, disability, profit sharing, bonuses, and 401(k) match
- Worker’s compensation insurance
- General liability and auto insurance
- Mobile phones and field computers
For example, if the annual indirect costs listed above for an individual are $20,000 and his wages are $80,000, then the burden rate is $0.25 per $1.00 of wages. This rate should be applied to estimated labor costs at the beginning of the bid phase to maintain sufficient gross margins to achieve profitability.
For more information on calculating labor burdens or for assistance with determining which costs can be included in the indirect cost pool for allocation, feel free to contact one of Keiter’s Real Estate and Construction team members. 804.747.0000 | email@example.com
Zach Webber is a Supervisor in Keiter’s Business Assurance and Advisory Services department. Zach is responsible for performing accounting and auditing related tasks, such as planning and preparing audits, recording transactions in journals, reconciling accounts, and preparing financial statements. He serves clients in the real estate & construction, not-for-profit, and financial services industries. Zach is a member of Keiter’s Construction & Real Estate Industry team.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.