Construction business owners must understand direct and indirect costs for client billing and taxation purposes. Then the construction business can effectively bill clients by determining exactly how much the project will cost. Some costs are not specific to the project at hand, but they can take away from the business owner's actual revenue and shouldn't be taxed. By properly categorising costs as direct or indirect, the business owner can maximise profit without getting in trouble with the Internal Revenue Service.
Direct costs are all costs that are directly associated with the project. Direct costs include subcontractors, hired labour, materials, supplies, equipment, bonds and permits. Tools that are lost can also be factored into costs, according to the IRS. Fuel and cell phone costs are also direct costs. However, the tools, equipment, supplies and fuel are only considered direct costs if they are only specifically used for the project. If these factors are used across several projects, then they become indirect costs.
Workers who are paid a salary can be considered an indirect cost since this salary does not apply directly to the project and instead is paid to the labour for overall work, according to the Journal of Construction Accounting and Taxation. For example, if a construction contractor has a paid electrician, who works for the construction company full-time as an employee, that electrician might not be the cost of a specific project in the same way that a one-time independently contracted electrician is a cost specifically to the project. Any bonuses given to the workers for a specific project are direct costs, while bonuses given for overall performance are indirect costs. So if the employer provides bonuses each time an employee completes a job, that bonus would be a direct cost to the specific job.
Indirect costs are the general liability of automobile insurances, motor vehicle repairs, depreciation, field communication expenses, employee benefits and payroll taxes, according to the Journal of Construction Accounting and Taxation. Some forms of insurance are considered direct costs if they are purchased on a project-by-project basis. Employee paid vacation time, holidays, sick days, drivers, warehouse personnel, training, safety and clothing are all indirect costs.
Maintenance is another aspect of indirect cost that cannot be tied to a specific project since equipment receives damages over time from a variety of projects. However, specific damages caused to equipment during a project can be considered a direct cost since they can be applied to a specific project. In addition to maintaining equipment, equipment also accrue costs as they depreciate in value.
Those hired to engage in contract supervision often are paid a salary and are not paid per project, so they count as indirect costs, according to the Journal of Construction Accounting and Taxation. The employer will not only have to factor in salary as an indirect cost but must also factor in payroll taxes.
When the business must pay dues or pay subscription fees to be able to receive discounts on products or receive other services, they are also considered indirect costs, according to McGraw Hill Construction, a website devoted to connecting construction contractors with clients. Construction contractors might subscribe to journals like the Journal of Light Construction. Dues are needed for membership in organisations such as the Construction Licensing Officials Association of Florida.