Electrical Estimating Methods, 4th Edition

CHAPTER 7 Indirect Costs

Indirect costs can be defined simply as the costs of operating a business. These expenses are sometimes referred to as main office or home office overhead. Indirect costs may include certain fixed, or known, expenses as well as costs that can be variable and only approximated. Home office overhead for a company that is well established and has created a market niche, may vary only slightly year to year. For new, growing companies, home office overhead can be volatile and change monthly. It make take years to stabilize. While not meeting the strict standard as a cost, profit and contingencies are called a cost as they are a cost to the client that pays the bill. Profit and contingencies are more subjective and can often be determined by less tangible formulas than other indirect costs. They are based on the judgment and discretion of the person(s) responsible for the company's growth and business plan.

Home office overhead, contingencies, and the assignment of profit are often the deciding factor in winning a bid. The rationalization of that statement is that if direct costs are relatively close from bidder to bidder, and they should be, then winning comes down to the indirect costs applied in the Estimate Summary. For the purpose of this chapter, indirect, home office, and main office overhead will be considered synonymous terms.

The direct costs of a project must be itemized, tabulated, and totaled before the indirect costs can be applied to the estimate. ...