10 types of construction expenses you need to know

Construction projects are incredibly complex beasts. From designing the project to permitting to sourcing materials to managing staff, there are just so many variables. And that’s even before the building process begins.

High levels of complexity mean there are an infinite number of ways things can go wrong. Many of them relate back to cash flow management and budgeting, like in these famous examples: 

• The Sydney Opera House, which was supposed to take 4 years to build and AUD 7 million, ended up taking 14 years and costing AUD 102 million. The project suffered from poor planning, scope changes and lack of communication. 
• The same goes for the Big Dig, a highway project in Boston. The initial cost estimate was $2.5-$2.8 billion, which swelled to $22 billion by the time it was finished in 2007. The culprits were poor workmanship and substandard materials, which resulted in massive safety issues.

For both large and small projects, the financial risks for construction business are high. They may not get paid for budget overruns like the above examples – a term known as loss and expense in construction. 

If the client (not the contractor) causes the additional expenses, the contractor will have to submit a loss and expense claim against the client. Part of the claim submission process is an accounting of highly detailed, accurate transaction records for the client to review. 

Tariffs imposed by the new administration layer on another level of complexity. Though many construction materials are exempt, importers of steel and aluminum are paying 25% tariffs. Prices are rising, and construction companies will have to increase rates in order to cover their costs. 

Now more than ever, it’s critical for construction businesses to have rigid expense policies and a clear, current understanding of their expenses. With the tariff landscape changing quickly, construction teams need to be able to accurately forecast costs and pivot when prices rise. A key element of this process is understanding the many different types of construction expenses. 

Know the key construction expense categories

• Labor costs are the expenses paid to workers on a construction project. They include direct wages for skilled workers like electricians or plumbers, and payroll taxes, insurance and benefits for salaried skilled workers. This is the largest, most variable construction expense, with estimates ranging between 20% and 40% of the total construction project costs on average.
• Materials and supplies include all expenses for physical products needed to build the project. Typical construction materials are things like lumber, concrete, paint, electrical wiring, roofing and fixtures. Materials and supplies are also a large chunk of a construction budget, ranging from 30% to 40% of total project costs.
• Equipment rental and maintenance covers expenses for any machinery needed to complete the project – and any necessary equipment repairs. Heavy machinery from bulldozers, dump trucks and concrete mixers down to electric drills and jackhammers is included in this category.
• Fuel and transportation costs include expenses for fueling heavy machinery, vehicles and even generators used on the project, and transporting materials, workers and equipment to and from the project site. It can also include vehicle rentals and maintenance, and sometimes air travel for project staff. 
• Permits and inspections are the fees levied by local entities to monitor the building process and make sure construction projects comply with building codes and regulations. Permit expenses can be based on the size of a project or just a flat fee (or both). For example, $50 for a new building permit plus $.15 per square foot. Then there are additional permits required for electrical, mechanical and plumbing work. 
  
  Inspection fees are the costs associated with site visits by local authorities during construction. Other expenses included in this category are plan reviews, certificates of occupancy, permit renewals and penalties for building without a permit.
• Site security and safety covers expenses that protect construction projects from theft, vandalism and workplace accidents. These fees also ensure that projects are in compliance with safety regulations. 
  
  Security cameras, security guards and fences around projects are all examples of site security fees, which can lower insurance premiums. Examples of safety features are equipment like hard hats and protective eyewear, safety officers to monitor projects and safety plan review. They drastically reduce the likelihood of noncompliance fees.
• Technology and software include costs for any digital tools used for the project. These fees can include both initial setup and recurring subscriptions for things like project management and accounting tools. Other related expenses are for employee training, support and maintenance.
• Per diem expenses are daily allowances for food, hotel stays and any incidentals. There’s generally a set rate per day based on the cost of items in a local area and the overall project budget.
• Office and admin overhead are indirect costs incurred by running a construction company. These expenses aren’t tied to a specific project. They include things like office space and utility bills, staff salaries for admin employees, office supplies, business insurance, taxes, legal and accounting services and marketing.
• Change orders and contingencies are any fees related to actual (or possible) changes in a project. Change order expenses are the costs incurred when a project changes. They can be client-related, like changes to the design of the building, or influenced by outside factors, like unknown site conditions or supply shortages. Contingency expenses are funds reserved to unexpected costs on a project.

Mapping expenses to construction accounting

Because of the variability in construction projects, there’s a specific type of accounting required for construction companies. Standard accounting is anchored on the idea of a routine flow of transactions, while construction accounting is project-based – each project is a separate financial entity.

Job costing is a critical part of construction accounting. Every expense on a project must be associated with the correct job cost category in order to accurately assess project costs and profitability. All those construction expense types described above must be included so project managers and contracts can assess whether a project is on-time and on-budget.

Revenue recognition also differs from traditional accounting, where businesses recognize revenue when they deliver products and services. Because construction accounting is project-based, construction companies can recognize revenue based on project milestones or percentage of completion. It’s imperative to have access to real-time expense data in order to accurately recognize revenue by project.

How PEX helps construction teams master expense control

With PEX, construction businesses have the structure to manage expenses with visibility and control. 

Expenses will always fluctuate across multiple job sites – it’s just the nature of construction projects. PEX’s real-time expense tracking gives construction leaders visibility into current spending. If a project is about to go over budget, they can change spend policies in the moment, or transfer funds from an under-budget project to cover the gap. 

Real-time expense tracking is only meaningful for construction teams when those critical job cost codes are present. Otherwise, finance teams won’t know where to allocate spending. Among PEX’s automations is the option to pre-program job cost codes to match appropriate merchants. When employees submit expenses, those job cost codes will auto-populate for each expense, removing a heavy manual lift for finance teams and employees.

Construction teams also have access to PEX’s virtual and physical corporate cards, which allow them to empower staff to spend within a framework. Virtual cards can be configured per merchant with a maximum spend amount, while physical corporate cards are a fit for employees with higher, more frequent spending needs. With these options, site supervisors get instant access to funds, reducing the likelihood of project delays due to slow reimbursements.

And finance leaders can create custom spend rules for both types of cards, limiting spend by merchant, cardholder group, day and time or location. Any transactions attempted outside these rules will be blocked, stopping unauthorized spending before it happens. 

Construction companies may also have a mix of spending. Some staff may use virtual cards, physical corporate cards or personal card reimbursements. In the PEX platform, they can manage all of these types of spending – including personal reimbursements. Employees can submit requests for personal card charges and mileage reimbursements with the ease of the PEX mobile app. 

Make construction expenses your competitive advantage

All these functions add up to big benefits for construction teams, who can save up to 657 hours annually on finance tasks. That time savings translates to $35,476 in annual labor cost savings that can be invested in existing projects or efforts to grow the business. 

Are you ready to increase visibility and control over your construction business’s expense processes, all while saving time and money? Book a demo with PEX today.