David,
Generally speaking, Project Manager related expenses (including vehicle expenses, mobile devices, reimbursements) are considered Indirect Cost, which is allocated back to jobs.
One view of Indirect Cost vs. Overhead Expense in general is to ask these questions:
- If we had no jobs would we have this cost?
- Would this cost increase in direct correlation with an increase in volume?
Overhead should increase at a much lower rate with an increase in volume than Indirect Cost. Some examples of other Indirect Cost are:
- Project / Contract Administrator Expenses
- Field mobile technology expenses
- Safety related expenses
- Equipment expenses
- Shop / Warehouse / Yard expenses
- General Liability Insurance (depending on the policy, it could be tied to Labor, Billings or Earned Revenue)
There are many methods of allocating Indirect Cost pools back to jobs, such as a $ rate / labor hour, % of labor cost, and % of job cost. The labor based allocation methods are especially relevant for MEP contractors, because the more labor involved on a job, the more Project Manager and other related Indirect Cost will be required to manage the job.
Equipment related Indirect Cost is typically allocated based on a rate per hour, day or month. Frequently, a blend of multiple allocation methods provide the most accurate representation of Indirect Cost allocated to jobs.
Before changing Project Manager related expenses from Overhead to allocated Indirect Cost, consider the following:
- New Job Starts - You should consider applying the new method of accounting for Project Manager expenses on new jobs only.
- Current Jobs Projected Cost at Completion - If you apply the new allocation method to existing jobs, there will be an impact to the % Complete on the WIP. You will need to adjust the Projected Cost at Completion to include the anticipated allocation.
- Financial Reporting to External Parties - Banks and Sureties base lending and surety decisions on your company's prior Gross Margin range. If you move Overhead or Indirect Cost to an allocation approach, make sure you have conversations with the banks and sureties before you proceed.
- Project Manager Communication - Make sure that you work through the allocation approach with all parties involved. In many cases, Project Manager performance is measured and incentives are provided based on Gross Margin produced. A Project Manager's baseline expectation should be to produce enough Margin to not only cover their cost, but to also provide Contribution Margin dollars to bottom line profit.
I hope this helps. Feel free to contact me for more information.
-------------------------------------------
Brian Andrew BBA
Manager - Financial Solutions Group
D. Brown Management
Duluth GA
(404) 379-5198
-------------------------------------------