Construction business owners should understand about the direct and indirect costs for customer billing and for tax purposes. Then the construction business effectively can bill customers to determine exactly to what extent the project cost will. Some costs are not specific to the project in question, but can be removed from the actual income of the business owner and should not be taxed. When correctly categorizing the direct or indirect costs, the business owner can maximize the benefits without getting into trouble with the Service of Internal Revenue.
Direct costs are all expenses that are directly related to the project. Direct costs include subcontractors, the hand of hired labor, materials, supplies, equipment, bonds and permits. The tools that are lost can also be taken into account within the costs, according to the IRS. Fuel and cell phone costs are also direct costs. However, tools, equipment, supplies and fuel are only considered direct costs if they are only used specifically for this project. If these factors are used across multiple projects, then they become indirect costs.
Workers who receive a salary can be considered as an indirect cost since this salary is not directly applied in the project and instead is paid to labor for the work in general, according to the Journal of Construction Accounting and Taxation. For example, if a construction contractor has a paid electrician, who works for the full-time construction company as an employee, that electrician might not be the cost of a specific project in the same way as an independently contracted electrician for one time specifically for the project. Any bonuses given to workers for a specific project are direct costs, while the premiums given for overall performance are indirect costs.
Indirect costs are the overall responsibility of auto insurance, motor vehicle repair, 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 have been made on a project-by-project basis. An employee’s vacation pay, holidays, sick days, drivers, store personnel, training, safety and clothing are all indirect costs.
Maintenance is another aspect of indirect costs that cannot be tied to a specific project, as the team receives damage over time from a variety of projects. However, specific damage to the equipment during a project can be considered a direct cost as it can be applied to a specific project. In addition to maintaining the equipment, it also accumulates costs, since they are depreciated in value.
Those hired to participate in contract supervision are often paid a salary and are not paid per project, so it counts as indirect costs, according to the Journal of Construction Accounting and Taxation. The employer will not only have to factorize the wage as an indirect cost but also must take into account payroll taxes.