Builders often approach me with questions about how to account for project management costs in their construction projects. This includes considerations like whether to include the cost of a project manager per site in the bill of quantities, or whether to treat it as one of the fixed costs. The answer to these questions depends on the specific circumstances and needs of your construction business. In this blog, we'll explore different scenarios and how to handle project management costs effectively.
- Your Role in Project Management
If you're a small builder and actively involved in project management, your business is essentially paying your wage for this role. In such cases, it's considered a fixed cost that must be factored into your gross profit margin. Your gross profit margin needs to account for this overhead cost, alongside other expenses.
- Employed Project Managers or Site Supervisors
Alternatively, if you employ a project manager or site supervisor on a regular salary, their compensation is also considered a fixed cost. This fixed cost needs to be deducted from your overall gross profit for the business. When determining your profit margin for a project, you must ensure it covers these fixed overheads.
- Contract Supervision
Some builders opt for contract supervision, where they pay a percentage of the job to a contractor to handle project management. In this case, the cost is included in the bill of quantities as a variable cost. Since the overheads are smaller, you don't need as much gross profit to cover them. This approach can provide flexibility in your project costs.
- Finding the Right Balance
There's no definitive answer to whether project management costs should be included in the bill of quantities or treated as a fixed cost. The choice largely depends on your business model, resources, and preferences. The key is to ensure that you allocate enough gross profit per job to cover these fixed overheads, whichever method you choose.
In the construction industry, managing project costs is essential for the success and profitability of your business. Project management costs are a significant part of your expenses, and how you account for them can affect your profit margins. The right approach depends on your unique circumstances, and there's no one-size-fits-all solution. If you need further guidance or have questions about constructing accurate bills of quantities, calculating margins, or optimizing your business's profitability, reach out to professionals who specialize in the construction industry. Your profitability in the building business largely depends on your ability to adapt and find the right balance, as well as the current market conditions.
Looking forward to helping you make your construction business a success. If you have questions regarding net profits for a building or new home construction business in 2023, it's important to consider what the market will allow. Typically, a net profit between 5% and 10% is seen as reasonable in the current market landscape.