Direct and indirect costs – that's why the margin is falling
Created December 2025, Reading time: approx. 2-3 minutes
Understanding the difference between direct and indirect costs is one of the most basic yet underrated skills in professional estimating. Most contractors have a good handle on what happens on the job site, but what happens before, after, and around the actual execution is often what turns good projects into bad projects – financially speaking.
This support article goes into depth on what distinguishes the two cost types, why they are often miscalculated, and how you can establish a more precise, robust, and profitable costing routine.
What are direct costs?
Direct costs are all costs that can be directly linked to a specific activity or item in the project. They are measurable, visible, and relatively easy to estimate when quantities and scope of work are well defined.
Typical direct costs:
Materials (concrete, steel, wood, plaster, insulation, pipes, cables, etc.)
Hourly costs for own employees
Subcontractors
Machinery and equipment
Transportation
Waste management
In many projects, these account for 70–90% of the total cost. Yet we see that even small errors can grow dramatically when they multiply across the entire project.
Common mistakes in direct costs:
Underestimated quantities
One wrong dimension creates consequences in quantities, price, progress and logistics.Too optimistic times
Many calculations are based on “best case”, not “realistic case”.Old pricing information
Prices for machinery rental, steel, lumber, and transportation change frequently – using outdated price databases is like calculating blindfolded.Lack of shrinkage and cutting
Material waste is real – and significant – especially for plaster, tiles, wood and pipes.
What are indirect costs?
Indirect costs are costs that affect the project, but cannot be directly linked to one specific item. These are costs that are often “forgotten”, explained away or wrapped up in the contribution margin – and thus never made visible in the calculation.
Typical indirect costs:
Administration
Project management and coordination
HSE and SHA
Cars and tools
Office and warehouse
IT systems
Rig and operation
Construction power and temporary installations
Why are indirect costs so dangerous to underestimate?
Because they:
are not visible on one line in the calculation
steadily accrues regardless of the project
often underestimated or omitted
puts pressure on contribution margin
eats up the margin without you noticing until it's too late
Indirect costs are a silent margin killer: You don't see them – but they're working against you all the time.
The pitfalls – why do things go so wrong?
Misjudgments often occur for four reasons:
1. Optimistic work planning
Many calculations are built on ideal time:
No waiting. No interruptions. No complaints. No logistical challenges.
The reality is different.
2. Incomplete quantities
A typical example: A 10% error in quantity does not result in a 10% error in the calculation – it results in a 10% error in materials, hours, waste and logistics. Several links are affected simultaneously.
3. Outdated pricing basis
Construction material prices can vary from month to month. Machinery rental and transportation change quickly.
Old price books = lower margins.
4. Forgotten indirect costs
HSE, rigging, coordination, project management, construction electricity, vehicles and tools often end up in the “it will be fine” box. It doesn’t.
4. How to calculate direct and indirect costs correctly
To hit more accurately, you need to have a clear methodology.
Step 1: Start with the quantities
All direct costs are based on quantities. Good basis = good calculation. Uncertain quantity = risk.
Step 2: Standardized and realistic times
Use:
history from own projects
realistic productivity targets
time-influencing factors (weather, logistics, labor conditions)
Step 3: Calculate indirect costs as a separate part
Indirect costs should not be “baked into” an item. Create separate chapters in the calculation:
Rig and operation
Project management
Administration
HSE / SHA
Transport and logistics
IT costs
Common operating costs
Step 4: Give the project a reasonable risk margin
Not as a markup for “luck”, but an estimated sum based on:
uncertainty in quantities
uncertainty in prices
complexity
progress risk
UE risk
5. Example: How the margin disappears in practice
Let's say you calculated a project with an 8% margin.
The following happens in the implementation:
Shrinkage and loss were 5% higher than expected
Transportation costs were NOK 10,000 higher
Project manager spent 25 hours more than planned
Warehouse rent extended by one month
The car drove 600 km more than expected
You forgot 7,000 NOK in HSE documentation and meetings
Result: The project breaks even – or in the red.
None of these mistakes are dramatic on their own. Together, they are catastrophic.
Best Practice: How to Avoid Negative Projects
✔ Update price banks frequently
At least once a month.
✔ Enter all indirect costs – every time
Don't skip them even if the project "looks small."
✔ Use your own key figures
Own historical figures are always more precise than generic industry figures.
✔ Standardize the calculation process
Create fixed templates for:
rigging and operation
project management
administration
logistics
tool wear
✔ Evaluate the projects after completion
Not just on results, but on:
deviation in hours
deviation in quantities
deviation in UE
deviations in rigging and operation
History is worth its weight in gold in future calculations.
A calculation without indirect costs is a calculation with hidden losses.
A calculation based on ideal time is a calculation without a basis in reality.
A calculation with old prices is a calculation that is inaccurate.
To deliver the right offers – and ensure profitable projects – both direct and indirect costs must:
be thoroughly surveyed
priced realistically
clearly documented
followed up throughout the project
When you gain control over both types of costs, you get better accuracy, more stable margins and fewer unpleasant surprises.
Do you need help with calculations?
We offer a solution that streamlines and simplifies the calculation process in construction projects. Book a free demo or get a no-obligation quote:
Read more about our calculation tool here!