What is meant by pricing general expenses?

The constant growth of the zealous market and the marketing costs urge various construction companies to concentrate on the execution of optimization strategies for minimizing illogically large management system expenses. When choosing any optimization plan, the relationship between the overhead rates, the business infrastructure components, and the management system is found by applying statistical methods. For optimizing the expenses of construction company administration, certain strategies are analyzed such as the real estate rearrangement of the company, irregular functioning of its administrative structure, and the transformation of the company’s management system. The construction costs are incurred during the construction of any structure and are the ones that can be incurred by following the process of construction under the supervision of the assigned contractor.  

The most effective idea to maximize the company’s growth under the intense pressure of different competitors in the construction market is to control the production expenses incurred and avoid the prevention of the non-production of the company’s goods completely. The general condition costs are further categorized into fixed and variable costs. Fixed costs never alter whenever there are changes in the work duration. Variable costs transform when the work salary or duration changes.

Types of costs

Direct and indirect costs

Indirect costs are set among the multiple projects of the company like home office overhead costs and are generally reimbursed as a division of the contractor’s salary. Direct expenses are incurred particularly on account of a particular project.

Operating and capital costs

The operating expenses incurred in the day-to-day work include wages, utilities, rent, sales general, and administrative expenses. The capital costs are with one-off expenditure on development or building structures of built assets and comprise of property acquisition, statutory fees, labor wages, insurance of the proposed project, commissions, and so on.

Hard and soft costs

Hard costs are associated with physical materials and products used for construction like site costs of drainage systems, landscape costs, brick, or other built-up materials. The soft costs contain land costs, off-site costs, office supplies, insurances, loans, and accounting salaries.

Whole-life costs and life cycle costing

The whole-life costs contain all the revenue related to the life of the building structure, right from the start of construction and operations till the ultimate disposal. The life cycle costing (LCC) gives a certain way to calculate the combined capital, operating, and life-end costs of the project range in order to make sure that long-term value is delivered.

Construction company overhead costs

Overhead costs are the ones that are not an element of the real construction process but are incurred by the contractor in order to support the work. Project overhead costs are inclusive of the expenses that are not charged directly to a specific field of work but are necessary for the completion of the project. The general expenses are fixed expenses that depict the cost of business procedures that are given by the contractor itself. The overhead costs depict General and Administrative (GA) functions like, human resources, finance and accounting, facility management, and strategic planning. There are chances to utilize GA functions more effectively by reducing the operating expenses around them.

The overhead costs are classified into four major categories:

1. Head office expenses (building facilities expenses, proceeding taxes and fees, depreciation equipment, and utility systems)
2. Transport expenses (Amortization expenses, rental, and fuel, along with taxes)
3. Salary of all head office employees
4. Proceeded taxes

Overhead expenses research

Analysis on fixed expense recovery, construction surveys, and statistical research on the understanding of the overhead expenses concept as well as the division of indirect costs. Nowadays, the price determination methods are financial specific and based on the computation of indirect costs according to the progress of the company. Construction companies are recommended to use the contribution margin accounting (break-even analysis), which gives the categorization costs of the contractor into a variable and fixed; and is a significant way for cost planning. The group of administrative costs contains head office staff wages, social insurance taxes, and administrative expenses (mail, office, communications, business trips, and other expenses).

Lump-sum general conditions (hybrid cost-plus contract)

The hybrid cost-plus contract contains all costs apart from the particular project general conditions costs where they are disclosed and supported throughout the work and audited in the end. The parties trade accurate cost control for the finest estimate method for minimizing administrative expense. Drawbacks of cost-plus contracting are that increased administrative expenses to keep and present the records of the cost datasheet monthly, audit cost completion, and so on. On huge construction sites, the project general condition cost values (project accounting, safety costs, legal fees) may be high enough to prove the detailed contract definitions and the administrative expense of tracking, maintaining, presenting, and auditing the costs. The added administrative expense becomes less proven on smaller projects. 

Bidding

Any bid is made up of two basic components; the first is the direct job cost estimate inclusive of direct labor costs, material and equipment costs, the second one is return or markup that covers the general expenses to permit gross profit on investment. After obtaining the net income, calculate the direct labor rate by dividing the respective amount by the total number of hours of labor calculated earlier. The result will be the direct labor cost per hour for the generation of that product or the delivery of that service.

Principle of contract negotiation

When handling negotiations between two parties, each side of the party will have various objectives and constraints. The main motive of each party is to get the most favorable and acceptable agreement. For instance, an organization is ready to buy a specific plot of land for $500,000, the owner is satisfied with selling the plot of land for $450,000 or more (negotiable). These highest and lowest sales revenues represent constraints on the agreement. Any buying within the range of $450,000 and $500,000 is acceptable to both of the involved parties and which organization or party gets the in-between interval of $50,000 solely depends on the marketing skills and knowledge for negotiation.   

Context and Applications

• Bachelors in Technology (Civil Engineering)
• Masters in Science (Construction Management)
• Masters in Technology (Civil Engineering)

Practice Problems

1. Which of the following costs is associated with physical materials and products used for construction?

1. Hard costs
2. Semi-variable costs
3. Line item
4. Direct costs

Correct option- a

Explanation: Hard costs are associated with physical materials and products used for construction.

2. Which of the following costs contains all the revenue related to the entire life of the building structure?

1. Administrative expenses
2. Depreciation costs
3. Soft costs
4. Whole-life costs

Correct option- d

Explanation: Whole-life costs contain all the revenue related to the entire life of the building structure.

3. What is the full form of LCC?

1. Life circular costing
2. Life cycle costing
3. Life central costing
4. Long cycle costing

Correct option- b

Explanation: The full form of LCC is life cycle costing.

4. Which of the following categories belongs to overhead costs?

1. Income statement
2. Financial statements
3. Transport expenses
4. None of these

Correct option- c

Explanation: Transport expenses are one of the categories of overhead costs.

5. Lump-sum general conditions are also known as-

1. Hybrid cost-plus contract
2. Insurance contract
3. All of these
4. None of these

Correct option- a

Explanation: Lump-sum general conditions are also called a Hybrid cost-plus contract.

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