Direct Costs

Definition of "Direct costs"

Written by

Shannon Mcaulay

Century 21 Family Realty

The meaning of direct costs implies such expenses that you can connect straight to a particular goods’ or service’s production, manufacturing, and preparation. As opposed to direct costs, we distinguish indirect costs, which can’t be traced back directly to the cost object (for instance, a construction site in real estate.) In other words, they do not apply to a product or service for sale. 

Administrative proceedings, maintenance services, and operational requirements will imply indirect expenses. Indirect costs don’t fluctuate with production levels. You’ll arrive at the total expenditure by adding direct and indirect costs.

Direct vs. indirect costs with examples

For instance, a building’s construction involves various direct expenses, such as subcontractor’s fees, materials, equipment, and labor. In contrast, the indirect costs define building permits, land survey, general and continuing costs of an operation (insurance, rent, and payroll taxes). Interestingly, companies will define rent (and other overhead) as a direct cost of units produced in their facility in particular cases. 

The amplitude of production and management influences these costs. In addition, we can classify direct costs into two categories, variable costs, and fixed expenses. 

What are direct costs in real estate?

In real estate, you’ll find direct and indirect costs regarding a house’s or other facility’s construction. Direct costs define the expenses accountable directly on the building, for example, manual labor, raw materials, and equipment. They pre-establish these direct costs in meticulous analysis based on the upcoming activities, construction processes, the site’s aspects, and resources.  

What concrete direct costs does construction involve?

Let’s suppose you wish to build a house on your newly acquired land. Then you’ll have to consider the following costs. First and foremost, you have to pay the land cost and the subsequent development rights. The latter entails building and legally possessing the structures on a given land. 

Joint development agreements and direct costs

Because land prices recently increased, people with real estate development interests decided to form so-called Joint development agreements. The landowner and the individual contractor or construction company struck up a deal. The owner offers their land to the builder within the property construction project. Typically, land and development rights imply registration and stamp fees, rehabilitation, and incidental expenses.

Development direct costs come at a (great) price.

As you already noticed, there are quite a few expenses on property development. Most home builders can’t manage to finance this project personally. For this reason, they will turn to banks and apply for a loan. 

You will have to meet building and development costs. In their turn, these include the following improvement charges, construction permission fees, conversion costs. Secondly, the building project will entail labor expenses for the construction site and the acquisition of raw building materials as direct costs. These are all the building company’s responsibilities. 

Often, parties involved in real estate projects will have to expect costs regarding depreciation and hiring charges of equipment utilized during the process. Technical assistance and design costs should also be considered. Responsible parties should also calculate the estimated expenses allocated for corrections, amendments, and improvements to the building into the budget. 

Environmental remediation fees cover the costs of removing hazardous materials from the construction site. Besides, it would help if you reckoned with warranty costs. And finally, expect real estate property taxes paid during construction demolition costs (if there was another building on your land.) 

Note, however, that you should contact a professional to get a detailed estimate on the building expanses! 

What are the indirect costs of construction?

Unlike direct costs, indirect ones don’t refer directly to the operation within a building project. The construction company must cover fees for administrative dealings and personnel earnings. In addition, they pay for office maintenance, mortgage, rent paid for the bureau, marketing activities, shipping and postage expenses, etc. In short, indirect costs finance operations essential for the business’s day-to-day existence and growth.