Indirect Construction Costs: Check Staffing Level

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Indirect construction costs are part of the construction process and are overhead but can't be tied to individual houses.

November 01, 2003

 

Chuck Shinn, President, Lee Evans Group

cshinn@

leeevansgroup.com

 

 

Indirect construction costs are overhead such as superintendent salaries and bonuses, general labor, trucks, trailers, warranty costs, etc. They're part of the construction process but can't be tied to individual houses. The target for these costs is 3.5% of sales. If they're out of line, look at the staffing level for supers, assistants and punch-out people.

 

Supers' salaries, bonuses and payroll should total 1.5%. Trucks, equipment, etc., should be 1.4%. Hold warranty costs to 0.6%.

Make sure you load supers at their optimum production capacity. Most have a good idea of what that is. Develop criteria for the volume level that requires bringing in an assistant and then write a specific job description for that position.

Scheduling has a huge impact. Superintendents can handle only a certain number of houses at once. To increase yield, reduce cycle time. If a super can handle only 15 houses at a time and it takes 120 days to build, he'll get 45 houses a year. But with a 90-day build time, the same super can produce 60 houses.

Scopes of work and quality standards for trades are key. The more that trade crews police their work, the more efficient the super will be. Write performance checklists from scopes and quality standards and require trades to check their work before you pay them.

 

 

 

 

 
Target
Typical
Sale price
100.0%
100.0%
Cost of Sales
70.0%
78.0-85.0%
Gross Margin
30.0%
15.0-22.0%
Indirect Construction Costs
3.5%
5.0-6.0%
Financing expense
4.0%
3.0-7.0%
Marketing expense
6.0%
5.0-10.0%
General administrative expense
4.5%
4.0-7.0%
Total operating expense
18.0%
16.0-22.0%
Net profit
12.0%
3.5-5.0%

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