Optimizing Project Costs: How Construction Firms Manage Salary Allocations
Construction companies frequently face the question of whether to allocate estimators’ and project managers’ (PMs’) salaries as direct project costs or to treat them as indirect overhead costs. Each approach has its advantages, and firms often choose based on factors like administrative resources and the need for precision in project cost tracking. Here’s an overview of the most common strategies.
Direct vs. Indirect Allocation Approaches
Many companies allocate PM salaries directly to project costs, reflecting their hands-on involvement in managing projects. Estimators, on the other hand, often contribute indirectly across multiple projects, making their salaries more suited for indirect allocation to overhead.
For companies prioritizing accuracy, a direct charge to specific projects allows precise job costing but may require a detailed time-tracking process for PMs and estimators. Companies using this approach might leverage ERP systems to track and allocate time with minimal manual entry. The one concern here is, does the cost of time tracking outweigh the project cost benefit.
Hybrid and Percentage-Based Models
Some firms adopt a hybrid model, allocating PM time directly to projects only when their work can be specifically assigned, while treating other PM activities as overhead. This approach is helpful when PMs work across multiple projects or when a detailed tracking system is not efficient.
Others simplify this further by using a percentage-based allocation. For example, a company might allocate PM time to projects based on each project’s share of monthly job costs, or apply a fixed percentage for indirect allocations. This keeps things simple and reduces the administrative burden, although it may sacrifice some accuracy.
Best Practices
Companies with larger project portfolios often find that setting up a structured accounting policy — such as defining a standard rate for estimators and PMs or using burden rates to reconcile payroll with project costs — improves both financial visibility and efficiency. Many firms also use key performance indicators (KPIs) based on time tracking for estimators and PMs to enhance project budgeting and management practices. Our advice, think about the outcome you achieve from enabling the process and ask yourself the following questions.
* Does understanding the cost of float resources like PM and Estimators change significantly from project to project?
* What is the outcome I achieve by tracking it?
* Are there better options to gain performance efficiencies from those team members?
