The Three Basic Categories of Project Costs

Estimating some construction projects can be challenging, and doing it correctly is truly a talent. Back in the days before estimating software existed, field experience was a must for estimators, as they would build projects step by step in their minds. Their best guesstimates became the estimates, a mixture of guesswork and calculations.

Although there are many tools available today, it is still helpful to learn the skills that aid in properly estimating a construction project. Project costs typically fall into three basic categories—direct cost, general conditions, and profit and overhead.

The direct costs include heavy equipment, construction materials, and labor—all the costs that can be directly attributed to the production of the physical product on site.

General conditions are the invisible or indirect costs needed for a project. General conditions can be divided into three types— preconstruction costs, construction organization costs, and project operations costs. These are sometimes referred to as soft costs.

Preconstruction costs can include document review, estimating, contract negotiations, scheduling, project managers, and any other costs related to the planning that takes place before actual construction begins.

Construction organization costs can include consultants, safety directors, engineers, project managers, superintendents, estimators or other related costs incurred through the construction phase.

Project operations can include temporary toilets, dumpsters, permits, job trailers, telephones, temporary power, site signage, security, vehicles and equipment, or any other cost related to project operations.

Overhead refers to operating expenses associated with running a business that can’t be linked to any specific business activity. It can include rent or mortgage, utility costs, administration and legal expenses, office supplies, employee training, business development, insurance costs, or any other expenses related to office operations.

Profit is the difference between the amount earned and the amount spent. Many contractors factor it into their estimates as a percentage of the total cost of the project. This percentage can vary between contractors as they seek to be competitive. Many factors play into determining profit percentage, including project cost, timing and duration of the project, risk factors, taxes, financing, as well as the contractor’s workload.

Different contractors may classify similar items in different categories. For example, a contractor’s accountant may want to classify workers’ compensation insurance as a direct cost, tying it to labor to monitor exact project cost at any given time, while another contractor may choose to classify all insurance as overhead. Either way, making sure all your costs for the project are included in your estimate will always help make the project run much more efficient while increasing profits.