What's the Difference Between Fringe, Overhead, and G&A Project Costs?
If you are a new and/or growing construction contractor, you may be confused by the differences surrounding overhead, G&A, and fringe cost pools. It is important to know these concepts to ensure your estimating strategy is correct. After all, the bottom line of your company depends on it. Read on to learn the difference between these three indirect costs and how they affect your estimating process.
What are Fringe Costs?
Fringe costs, or fringe benefits, are expenses related to your workforce like vacation time and sick leave. This helps contractors recruit and keep excellent employees. Fringe costs are taxable and included in the employee’s pay unless they fall under the IRS’s list of tax-exempt benefits. Some non-taxable fringe costs include:
- Commuting benefits
- Employee discounts
- Cell phones provided by the employer
- Tuition reduction
Certain rules and limitations can apply to some tax-exempt benefits. This type of indirect cost is easy to identify for estimates, but overhead and G&A expenses are harder to classify.
What are Overhead Costs?
Overhead costs are expenses related to construction contracts that are not specific to just one client. Overhead costs can be identified as “supporting” a contract. Interestingly, if a construction company does not have any active contracts, there cannot be any overhead costs. Examples of overheads costs may include:
- Indirect labor like a meeting with managers and the labor force
- Travel costs
- Costs to hire employees such as labor time for the HR representative, job advertising, and recruitment fees
- Managers overseeing several construction projects at one time
Types of Overhead Costs
There are three categories of this type of expense when estimating your overhead costs. The three different costs are fixed, variable, and semi-variable overheads.
- Fixed Overhead Costs- Fixed overhead expenses reoccur every month and do not change despite activity levels in the construction company. Salaries and government licenses are examples of fixed overhead costs.
- Variable Overhead Costs- This type of overhead cost varies depending on the level of business activity. The variable overhead expenses are higher if your company is busy, and the cost is lower when your business is not as busy. Variable overhead costs include equipment maintenance, legal expenses, and repairs.
- Semi-Variable Overhead Costs- Semi-variable overhead expenses have a base rate the company must pay, no matter the activity level. However, the overall cost may be higher because of your usage level. This type of overhead includes vehicle usage and utility costs.
What are G&A Costs?
General and Administrative, or G&A, costs represent expenses the company incurs running day-to-day operations. These costs do not pertain to one specific project, product, or contract. Some examples of G&A expenses are:
- Marketing
- Bids and proposals
- Accounting services
- Specific office supplies
- Insurance
- State and local taxes (not including federal taxes)
Labor may be included in G&A costs if the employees perform administrative duties for the company.
The Bottom Line
It is vital to understand the differences between these three types of indirect costs when estimating your projects. Doing so helps ensure your project estimates are correct, and your company maintains a healthy bottom line. If you are looking for a streamlined solution to help your company, consider investing in a construction estimating software program to help you keep track of your indirect costs.
