Construction Company Expenses: Essential Cost-Cutting Strategies for Seasonal Businesses

Construction companies must watch their expenses carefully. Overhead costs take up about 10-20% of the total budget. Running a seasonal construction business makes this balance even tougher. Construction firms in northern climates see their work slow down in winter months. Business picks up again during summer and fall.

Your profit margins can take a big hit from mismanaged overhead costs. These include admin expenses, legal fees, office supplies, and equipment. This makes it hard to compete with other businesses. The right balance between overhead and profit isn’t just smart business – your company’s survival depends on it. You might wonder what overhead costs mean in construction. You probably want to know how to handle these typical expenses as seasons change. This piece will show you practical ways to reduce costs while keeping quality high in both busy and slow times.

Understanding Construction Company Expenses

Your construction company’s financial success depends on how well you understand its expenses. Breaking down costs into categories makes it easier to track spending and find ways to save money.

What is overhead cost in construction?

Overhead costs in construction are expenses that don’t directly link to specific building projects but keep your business running. These indirect costs support multiple projects at once and include office rent, utilities, administrative salaries, insurance, and equipment storage. Much of your total project expenses come from overhead costs that can really affect your profits if you don’t manage them well.

Typical construction company expenses to track

Here are the main construction expenses you need to watch:

• Labor costs: Wages, benefits, and taxes for project workers and office staff (20-40% of total project costs)

• Materials and supplies: Building materials like lumber, concrete, and fixtures (30-40% of total project costs)

• Equipment: Rental, purchase, maintenance, and machinery depreciation

• Administrative expenses: Office supplies, utilities, rent, insurance premiums

• Regulatory compliance: Permits, inspections, and fees for building codes and safety standards

Fixed vs variable costs: what’s the difference?

Fixed costs stay the same whatever your project volume or duration. Monthly expenses like office rent, insurance premiums, and staff salaries barely change. Variable costs change based on your project scope and activity level. The amount you spend on materials, project labor, fuel, and equipment rental goes up or down depending on how busy your business gets.

This difference helps you budget better since fixed costs are predictable while variable costs need flexible planning.

Direct vs indirect costs explained

Direct costs are expenses you can tie to specific projects. These include materials, labor, equipment rentals, and subcontractor fees used for particular jobs. Project-specific overhead like site utilities, project management, and job supervision also count as direct costs.

Indirect costs, also known as general and administrative (G&A) expenses, help run your overall business rather than specific projects. Office expenses, administrative salaries, general insurance, and marketing costs fall into this category. The right allocation of these costs across projects matters a lot for job costing and profit margins.

Why Managing Overhead Matters for Seasonal Businesses

Seasonal fluctuations create unique challenges for construction businesses that want to stay financially stable. A seasonal contractor needs to know how overhead affects their bottom line.

How overhead affects profit margins

Construction industry runs on very thin margins. Average net profit margins range from just 3-7%. Every dollar of overhead directly affects your profitability. Many construction companies don’t estimate their overhead costs correctly when they prepare bids. This cuts into their already slim margins. Your profit is what’s left after you subtract both direct project costs and overhead expenses from your contract price.

Poor handling of construction company expenses can quickly shrink these profit margins. This makes it hard to compete in the market. Some industry sources show that net margins for the engineering/construction segment sit at just 2.16%. These numbers show why managing overhead isn’t just helpful – it’s crucial.

Seasonal changes and their effect on operating expenses

Seasonality in construction shows up as predictable shifts in business activity that happen at specific times each year. Unlike steady businesses, your construction operation sees big swings in revenue. Yet many typical construction company expenses stay the same.

During slow periods, expenses keep adding up while cash flow drops. You need enough financial reserves to cover overhead when projects are scarce. Smart revenue management becomes vital. Build cash reserves during busy times to keep operations running during slow periods.

Overhead and profit in construction: striking the right balance

The sweet spot between overhead and profit in construction needs careful financial planning. Smart contractors check their overhead cost allocation regularly – usually once a year or more if things change. This helps each project carry its fair share of expenses.

Set up emergency funds to help with cash needs during expected slow periods. Looking at past data during downturns helps find ways to boost profits when jobs are hard to find. Good financial discipline means saying no to unprofitable jobs just for cash flow. Taking these jobs often leads to bigger money problems later.

8 Cost-Cutting Strategies for Construction Companies

Your seasonal construction business’s profitability depends on how well you manage expenses. Here are eight practical ways to cut costs right away:

1. Conduct regular expense audits

Financial audits help you spot spending patterns and catch problems early. The process lets you check contract compliance, match invoices with terms, and look at bidding processes. Regular reconciliation helps detect small issues before they grow into bigger problems.

2. Use construction management software

Modern construction software makes budgeting, scheduling, and teamwork easier. Good systems track budgets live, estimate costs, and warn you about overspending. These tools are a great way to get deeper understanding of project costs and performance, which helps prevent budget overruns.

3. Outsource non-core business functions

Let external providers handle secondary tasks while you focus on what you do best. Industry reports show 70% of businesses outsource to cut costs. This approach saves money on full-time employee expenses like salaries, benefits, and training.

4. Negotiate better vendor contracts

Smart contract negotiations build lasting supplier relationships while securing better terms. Research market prices before talks to strengthen your position. Stay ready to compromise on some points to close a good deal overall.

5. Track and reduce equipment idle time

Construction equipment sits idle 40% of the time on average. Idle machines waste fuel, rack up non-productive hours, lose resale value, eat up warranty time, and wear out engines faster. Telematics monitoring of idle times saves substantial money.

6. Delay non-essential purchases during off-season

Slow periods are perfect for budget adjustments that match reduced income. Put off non-essential spending and talk to suppliers about better terms. This time works best for equipment checks and maintenance instead of buying new gear.

7. Implement energy-saving practices in offices

Commercial buildings waste up to 30% of their energy. Construction companies spend 5.7% of project budgets on energy. Simple changes like efficient lighting and better heating/cooling systems save money immediately.

8. Cross-train staff to reduce labor redundancy

Cross-training helps employees handle tasks beyond their main roles, which creates a flexible team. This strategy helps cover labor gaps without hiring more people. Your cross-trained workers can fill in for specialists, which reduces your need for subcontractors.

Allocating and Tracking Overhead Costs Effectively

Smart overhead cost allocation plays a vital role in keeping profit margins healthy. Let’s get into how you can distribute these expenses across your projects effectively.

Methods to allocate overhead to projects

You can distribute overhead costs fairly through several approaches. The traditional method uses direct labor hours or costs, assuming overhead relates directly to labor activity. Square footage allocation proves useful for building projects where costs get distributed based on project size. Machine hours method works best for equipment-heavy operations by assigning overhead based on equipment usage time. Construction companies often find that combining multiple methods gives them the most accurate results.

Using labor hours vs direct costs for allocation

Labor-based allocation suits labor-intensive contractors best and assigns more payroll-related overhead to jobs with higher payroll activity. This method assumes direct labor hours relate proportionally to overhead costs. The direct costs method allocates overhead as a percentage of all direct expenses, typically 10-20% of your total budget. Your specific business model should guide your choice – HVAC contractors might prefer labor hours, while others could benefit more from total direct costs.

Tools to track construction company operating expenses

Software solutions have made overhead tracking much easier today. Workyard helps you monitor labor costs through GPS time tracking and gives you live project cost breakdowns. Procore delivers detailed financial capabilities with direct cost management and automated budget updates. Livecosts creates simple dashboards that show project performance against budget and sends useful budget alerts. Planyard displays budgets clearly with visual overviews of project finances.

Conclusion

Smart overhead cost management helps construction businesses keep their profit margins healthy. This becomes crucial when seasonal changes hit our industry hard. Our piece shows how good expense management affects profits in a sector where margins typically hover between just 3-7%.

Seasonal construction brings its own set of challenges. Fixed expenses keep running whatever the project volume. The cost-cutting strategies above should be your standard practice, not just emergency fixes during slow times. Budget reviews, construction management software, and outsourcing non-core work are a great way to get savings.

Your equipment needs extra focus, given the 40% average idle time that drains resources. Staff cross-training adds flexibility when seasons change. These methods, plus smart overhead cost allocation, help balance expenses and revenue all year.

Construction companies that do well through seasonal cycles build financial cushions during peak times. They watch both direct and indirect costs closely throughout the year. The right tools make this process easier by giving immediate insights that lead to better decisions.

Disciplined money management drives success in seasonal construction. We can’t control weather or seasonal demand. But we can definitely control how we prepare and respond to these expected changes. Companies that become skilled at this balance don’t just survive slow periods – they grow and stay profitable over time.