Fixed vs. Variable Overhead in Construction: What’s the Difference?
- Cost Construction Accounting
- 1 hour ago
- 5 min read
Overhead expenditures are a major component of any construction project. Whether you're an experienced contractor or a small business owner, understanding the difference between fixed and variable overhead is critical for efficiently managing your project's budget. You may enhance your financial planning and get greater control over your profits by appropriately allocating these expenses. In this post, we'll look at fixed vs. variable overhead in construction, what each term implies, how it affects your organization, and how understanding these distinctions may lead to better cost management.
What is Fixed Overhead?
Fixed overhead costs don't change no matter how busy the building site is or how long it takes to finish. These costs stay the same no matter how much is made or how big the project is. Certain costs, like rent for an office or storage space, insurance premiums, and wages for workers who aren't directly working on projects, are known as fixed costs.
These are some examples of fixed overhead costs in construction:
Rent an office
Costs of insurance
Pay for workers who aren't working on the project (like administrative staff)
The loss of value of building equipment
Utilities (like water and power) that don't change no matter how big the project is
These fees don't change no matter how many tasks or work you do. It is important to know your fixed overhead because it helps you make a good budget and plan for long-term costs that won't change as your job does.
What is Variable Overhead?
Variable overhead costs, on the other hand, change depending on how big the project is or how much work is done. These costs change based on how busy your business is, which means they go up or down depending on how much you're making.
Examples of Variable Overhead Costs in Construction:
Costs of labor for workers who are only needed for one job, like electricians and carpenters
Costs of materials like concrete, wood, and steel
Getting fuel for tools and machinery
Temporary facilities or accommodations for workers
Variable overhead changes based on the size and scope of the project, while set overhead stays the same. It's important to understand these prices because they have a direct effect on the financial viability of your project.Â
Fixed vs. Variable Overhead: The Key Differences
Aspect | Fixed Overhead | Variable Overhead |
Cost Structure | Consistent, does not fluctuate | Changes depending on project volume |
Examples | Rent, salaries of permanent staff | Labor, materials, fuel for machinery |
Impact on Project Costs | Not affected by project size | Directly tied to the scale of the project |
Financial Planning | Easier to predict and budget | Harder to predict due to fluctuations |
Contribution to Profit Margin | Can reduce profit margin if not controlled | Directly impacts the project’s profitability |
Why Understanding These Costs is Important
For contractors to make accurate building budgets, they need to know the difference between fixed and variable overhead costs. Why? You might lose money on a job if you don't carefully manage your variable costs, like labor, materials, and machinery that cost more than you thought they would.
Also, not handling fixed costs well can make your business less efficient. For instance, renting office space or paying for tools that you don't use for certain projects can put extra pressure on your finances. If you understand these factors, you can make smarter business choices, like renegotiating leases to lower fixed costs or making the most of your project plans to cut down on variable costs.
How Do Fixed and Variable Overhead Affect Profitability?
Keeping track of extra costs correctly affects how profitable your project is. As was already said, variable overhead will change based on how the job is going. When your projects get bigger, your variable costs go up. This means you need to make sure you get these costs right so you don't underprice or overestimate your budget.
Even though fixed overhead is more stable, it still needs to be watched. Your set overhead costs can cut into your profits if your business isn't running at full speed or if projects take longer than planned. To keep good profit margins, it's important to keep these costs under control by cutting back on expenses that aren't necessary or renting spaces that are cheaper.
How to Manage Overhead Costs in Construction
Don't forget to keep track of your set and variable overhead costs: A good example of this would be construction accounting software. Make sure that all of your costs are put in the right category. This will help you look at your budget more clearly and keep your costs down.
Keep an eye on variable costs: Take the initiative to handle fluctuating costs. You can, for instance, try to get better deals from suppliers, make the best use of workers' plans, and look for ways to use materials more efficiently.
Look over fixed costs often: It doesn't matter if set costs don't change; they still need to be looked at regularly. If you see that a cost is going up, like rent or insurance fees, look into whether there's a way to lower it without lowering the quality of your work.
Include Backup Plans: Because changeable overhead costs can change, it's a good idea to include a backup plan in your bids or project budgets in case costs go up or down more than expected.
Frequently Asked Questions (FAQs)
1. What’s the difference between fixed overhead and direct costs in construction?
Direct costs are those expenses that are directly tied to the production of a project, such as materials and labor. Fixed overhead, however, includes costs that are not tied directly to any single project, like office rent or general administrative salaries.
2. Can fixed overhead change over time?
Yes, fixed overhead can change over time. For example, if you decide to move to a new office or renegotiate your insurance premiums, your fixed costs will be affected. However, these changes tend to be less frequent and more predictable than variable costs.
3. How do I calculate overhead for a construction project?
To calculate overhead, sum all your fixed and variable costs for the project. Then, allocate a percentage of these costs to each job or project based on its scope. Many contractors use a markup percentage to account for these overhead costs in their pricing structure.
The Importance of Bookkeeping Services
Contractors can handle their own set and variable overhead costs, but as your business grows, it can take more time and become more complicated. Using a trustworthy building bookkeeping service can help you keep track of your costs, making sure you don't miss any, and help your project make as much money as possible.
We are experts at construction financial planning and accounting here at Construction Cost Accounting. We offer services that not only help you keep track of your extra costs but also make sure that your budget works well. We'll take care of the complicated parts of allocating costs and managing your bills, giving you more time to grow your business and finish projects on time and on budget.
Conclusion
Any contractor or business owner in the building industry needs to know the difference between fixed and variable overhead costs. If you know how these costs affect the finances of your project, you can make better planning choices, keep your costs down, and eventually make more money. In the building business, accurate cost management is key to success. You can do this yourself or work with a reputable construction bookkeeping service like Construction Cost Accounting.
