Like any business, a successful construction company relies on thorough planning and detailed budgeting. This is key in construction companies, where overhead expenses tend to be higher. Payment terms can also be a lot longer than is the case for other small businesses.
In this article, we will go over the costs of running and maintaining a construction company. By the end, you will have a picture of what the costs are. You will also know the wide number of options available for funding the costs of your business.
Detailed Breakdown of Construction Company Expenses
1. Raw Materials
Naturally, one of the primary costs for construction companies is raw materials. Inventory upkeep is a primary concern for construction companies. Running out of material in the middle of a job or excessive delays in getting material to start new projects can add many costs. Additionally, recent Trump import tariffs could impact the prices of some raw materials and consequent cost to your business.
Nevertheless, the cost of raw material depends on the types and sizes of projects your company takes on. For example, the cost of commercial construction materials averages between $16 and $20 per square foot. With additional finishing, this cost can increase up to $40 per square foot. On the other hand, the average cost per square foot for residential construction is about $150.
2. Tools and Equipment
This is another significant cost. A construction company can purchase and maintain its own equipment or rent it from another company. Typically, the cost to rent equipment is $40 to $60 per $1,000 the item costs. That means that renting a $5,000 tool averages at about $200 or $300 each month while a $100,000 machine could cost as much as $6,000.
Labor is a third cost that must be taken into account.
If your lead employee is paid $40 per hour, a framer receives $25 per hour, and a newer employee earns $15 per hour, you are looking at $80 per hour in labor. This is simply one example of using a small construction team. However, at this rate, labor alone costs your company $640 for an eight-hour day.
This also does not take into account labor burden costs like payroll taxes, benefits, meals, insurance, training costs, and employee supplies. For labor burden costs, divide the total yearly cost by the number of your employees to figure out the cost of each.
4. Permits and Licenses
Permits, licenses, and renewals are things construction companies cannot operate without. Lacking proper permits leaves your business open to litigation or unable to operate at all.
These costs can vary widely depending on state and local regulations. However, it usually hovers around $0.80 per square foot, with an annual national average of about $430. Proper licensing often costs a few hundred dollars per year and needs yearly renewal. You can find here a detailed list of the licensing and insurance requirements for construction companies in the U.S.
5. Miscellaneous costs
There are other miscellaneous costs for construction companies too. Rent and utilities can both be factors. One of the great advantages of construction companies is that they often need no set physical location to operate. The nature of a construction company is to move from job site to job site. However, many construction companies still require space for off-site construction or inventory and equipment storage.
Insurance is another factor many forget to consider as part of their costs. However, the average cost of insurance for construction companies is over $1,200 per year. This means that coverage is no small investment for most businesses. You are not sure of what type of insurance you need? Find it in this article, where insurance requirements are organized by type of industry.
What are overhead costs in construction?
These are the indirect costs of running a business. They are not linked to any project, but rather they are continuous expenses. You still need to charge for these costs, so they are usually divided between all projects.
Costs Can Vary
Costs can actually vary to some extent, based on several important factors. For example, it may cost more money to secure certain materials in one part of the country than another. Utilities and labor can also vary in cost because of company needs, the cost of electricity, and state wage laws.
The size of your business and of the projects you take on also make a big difference. Companies focused on plumbing have different costs than those that do home remodeling or build entire structures.
Location can also make a big difference in your operating costs. Running a construction company in San Francisco costs far more than in Pittsburgh, and one in Pittsburgh would cost more than in rural Indiana. Location impacts utilities, rent, labor, and various other costs.
How Much Am I Making and How Much Am I Expending?
One of the essential details to keep before you at all times is how much your construction company makes versus how much it spends. Consider the table below as an example:
Contractor expenses structure and estimated profit for one week of a company’s operations
|$||Cost as a percentage of sales|
|Weekly raw material cost||3,000||30%|
|Payroll for the week||2,500||25%|
|Amount set aside or spent on repairs and maintenance||300||3%|
|Rent and property expenses||1,000||10%|
|Amount for miscellaneous expenses||2,700||27%|
The table above shows that payroll and raw materials take up about half of weekly sales revenue. The business owner grosses $4,500 on the $10,000 weekly gross, so his gross margin is 45 percent. The table also accounts for various other expenses like rent, utilities, repairs and maintenance, and property expenses. The remaining amount is $2,700 or 27 percent of the weekly gross. This can be set aside for any miscellaneous expenses, with what remains going toward profit.
Decreasing raw material costs or labor costs can increase this company’s profitability since these are its major expenses. Other costs can be harder to reduce and have less impact on profitability. If the company has an insufficient gross margin, it will have very little left to pay miscellaneous expenses. This causes a decline in profits and, if expenses build too much, can even create profit losses.
How do you calculate construction costs?
Of course, when running a construction company, sometimes the expenses can vary. It’s not the same paying for materials and labor for building a small house versus a mall. But how can you correctly estimate construction costs?
The gist of it is that you have to determine the cost of the materials and labor and apply a markup that will allow your business to make a profit. But estimating construction costs is not as easy as it might sound; there are many variables and many other things you need to take into account.
We recommend that, if you want to estimate construction costs, you use estimating software. It will make your life easier, and it will give you the most accurate numbers. Software programs like ProEst, Stack, and Clear Estimates are your best bet.
How Can You Cut Expenses in Your Construction Company?
A great way to boost profits in your construction company is by cutting costs. You may be surprised by some cost-cutting methods, even if you think your business has no excess spending. Any change that increases the cash flow is a good one.
Have in mind that payment terms in the construction industry tend to be longer than in any other sector. Construction business owners can expect to wait 90 days and even more to get paid for a project. Not receiving funds on time results in considerable costs. Finding ways to manage your accounts receivable (like adding a late payment fee, or rewarding clients who pay early) can improve the cash flow of your business. This means more ability to accept new projects because you have the cash in hand needed to get the materials.
Labor costs are often a big chunk of construction businesses’ operations. Reducing labor costs is, therefore, a major way to improve profitability. One potential method is to use more subcontractors when possible. You can learn here how to find independent contractors for your construction company.
While cutting the cost of raw materials or labor and finding ways to negotiate better payment terms can be extremely helpful, you can also consider the possibility of getting external financing. The right financing option will allow you to borrow funds to buy your inventory or purchase your equipment. While this may not change the overall cost, it relieves pressure on your business and makes it more productive. In fact, many construction companies rely on external financing and business loans to thrive and grow.
A Business Loan From Camino Can Help You With Your Costs
If you are considering taking a loan for your construction company, you can find in Camino Financial, a trusted partner. We live up to our motto, “No business left behind,” and your construction company, regardless of its size, is no exception.
Learn here all about Camino Financial small business loans and check for yourself the unique features and benefits that can help your business grow.
We are dedicated to helping your construction company flourish: many construction business owners like you have trusted us for their working capital needs. They have found in us the solution to fund their projects and maintain a healthy level of cash flow.
We offer a wide variety of financing options, and our business loan requirements are flexible. Our quick-turnaround processing makes it possible to get funded in as short as two days, so your construction company doesn’t suffer from the lack of cash flow to fund a new project.
Request a quote! It will take you just a couple of minutes, and you’ll know instantly if you pre-qualify for one of our business loans.