In Plain English
Quick Answer
Business costs that support the project but cannot be tied to a specific piece of work.
Definition
Definition
Indirect costs are project expenses that cannot be attributed to a specific work item but are necessary to support project execution, such as home office overhead, insurance, bonding, and general administrative expenses. They are allocated across projects as a percentage of direct costs. Managing indirect costs is critical to contractor profitability.
Context
Why It Matters in Bidding
Indirect costs determine the markup an estimator must layer onto direct costs to keep the company solvent, so under-allocating them produces bids that look competitive but lose money once overhead is absorbed. Accurately spreading home office overhead, insurance, and bonding across the active backlog is what separates a sustainable bid from a money-losing one.
Example
Example
Setting up the bid spreadsheet, the chief estimator applies a 9 percent indirect-cost burden on top of labor, material, and sub costs to cover home office overhead, insurance, and bonding before adding profit.
See Also
Related Terms
FAQ
Questions Contractors Ask
How are indirect costs different from general conditions in a bid?
General conditions are project-specific site overhead like the superintendent, trailer, and temporary utilities, typically itemized in the estimate. Indirect costs are company-wide expenses such as home office salaries, insurance, and bonding that are not tied to one job and are recovered through a markup percentage instead.
How do estimators calculate the indirect cost markup percentage?
Firms divide projected annual overhead by expected annual revenue or direct-cost volume to derive a recovery rate, then apply that percentage to each bid. The rate must be revisited as backlog changes, because spreading fixed overhead across less volume forces a higher percentage to stay whole.
What happens if indirect costs are underestimated in a winning bid?
The job may appear profitable at the direct-cost level but fail to contribute its share of overhead, eroding company-wide profit. Chronic under-recovery can drain cash reserves even on busy schedules, which is why estimators reconcile actual overhead against recovered markup at least annually.
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