Run a business – any business – and you’ll likely learn more than you’d ever want to know about operating costs. For the accountants and bookkeepers who watch these numbers for their employers, some terms become part of the everyday vernacular. Costs are broken down into direct versus indirect, with direct costs relating to those expenses that power the daily activities of a business. Indirect costs are those items that don’t directly connect to the products and services you provide but are no less necessary.
Direct Employees and Contractors
No work gets done without people. The employees and contractors who take your projects from “concept” to “completion” are direct costs. For employees, you’ll pay salaries and benefits, including health insurance. For contractors, you’ll pay hourly or per-project costs. You’ll need to track this throughout the year so that you can claim them as business expenses at tax time.
Equipment and Supplies
No construction company operates without equipment. You’ll need cranes, concrete mixers, shovels and a wide variety of other supplies to scale to a successful business. These are all classified as direct costs and easily claimable as expenses on your yearly tax return. Even vehicles like bulldozers are direct costs. Often businesses question whether company vehicles are direct or indirect, but they can fall into the category of fringe benefits for employees, which are considered direct costs.
Shipping and Postage
For product-based businesses, shipping and postage can fall into a gray area. If you’re shipping products to customers, you may see it as a necessary part of doing business. However, construction companies usually have postage under the header of “administrative fees,” since you’re likely mailing invoices to clients and payments to vendors. The determining factor is whether any cost is directly related to the cost of providing services to your clients.
Utilities and Rent
The gray area ends when costs are supporting overall business operations. Expenses like the money you pay for your offices or to keep the lights are in support of general operations. As you look down the list of monthly expenses, question whether a cost supports everything you do, including back-office operations. If it does, it likely goes in the “indirect” category.
Support Staff and Contractors
In addition to the workers you have in the field, you also probably have a support team, even if it’s only one person. Those who handle your human resources, office management or administrative tasks are considered indirect costs. These are related to the overall business rather than the projects you work on each day. Even the salaries of the people crunching your numbers and determining which costs are direct versus indirect are indirect expenses.