The most important concepts you need to know to master construction projects
Created December 2025, Reading time: approx. 2-3 minutes
Project economics in construction is a field with complex mechanisms, many dependencies and high financial responsibility. Yet there is a relatively small group of concepts that form the foundation for all decisions – from calculation to completed project delivery. If you understand these concepts and the connection between them, you will price correctly, manage better and earn more – regardless of whether you run small rehabilitation jobs or large turnkey contracts.
This article reviews all the most important concepts, divided into three groups:
Economic and accounting concepts
Project and management concepts
Contract and standard concepts
1. Economic and accounting concepts
These are the very building blocks of any estimate, regardless of size or type of contract.
Direct costs
Direct costs are anything that can be linked to a specific activity, construction phase, or item in the estimate. They are the core of pricing.
Examples:
hours for own employees
materials
subcontractors
machine rental and equipment
transportation
waste management
Direct costs typically account for 70–90% of the job. Errors here almost always result in financial discrepancies.
Indirect costs (overhead)
Indirect costs are those costs that affect the project, but cannot be directly linked to one specific item.
Examples:
administration
project management
accounting and finance
car costs
office space and warehouse
tool and equipment wear and tear
IT systems
rigging and operation
Many calculations fail because these costs are underestimated or forgotten.
Self-catering
Costs are the total costs actually incurred in producing the service.
Cost = Direct costs + Indirect costs
Only when you know the cost price can you calculate the correct price, assess profitability and set a professional selling price.
Contribution margin (DB)
DB shows how much money is left after direct costs are deducted from the sales price.
DB = Selling price – Direct costs
DB is critical for:
profitability
internal control
contribution method
assessment of which jobs you should take
If DB is too low, indirect costs cannot be covered – and the project goes into deficit.
Coverage ratio (DG)
DG is DB expressed as a percentage of the sales price.
DG = DB / Selling price × 100
DG shows how much “air” you have in the price for indirect costs and profit. High DG = safer project.
Hourly rate (cost and selling price)
Two concepts are often mixed up:
Cost-per-hour rate: what one hour actually costs the company
selling-hourly price: what the market/customer pays
Self-cost hours include: salary, vacation pay, employer's social security contributions, tools, car, administration, etc.
The difference between these is the profit.
Mark-up
A markup is added to cost to calculate the selling price. It is often used for:
materials
EU
machine rental
Mark-ups are calculated on cost price, not sales price.
Typical error:
"10% markup yields 10% profit."
→ No. Margin will be lower.
Margin
Margin is profit measured as a percentage of sales price.
Margin = Profit / Selling price
Margin is one of the best management tools to see how good the finances of your projects actually are.
Cost drivers
Cost drivers are the elements that affect price the most.
In construction projects this is often:
working hours
UE costs
material selection
logistics
risk
basic conditions
If you make a mistake on a cost carrier, it directly affects the margin.
Risk
Risk exists in all projects and must be valued – not ignored.
Types of risk:
technical risk
basic conditions
quantity uncertainty
hidden building parts
design error
UE coordination
logistics and accessibility
Professional calculators create a risk analysis before submitting an offer.
Risk premium
A risk premium is added to the price to cover possible additional consumption in hours, materials or logistics.
Typical levels:
small jobs: 5–7%
normal projects: 8–12%
complex projects: 12–20%
This figure must be documented and justified.
The contribution method
The contribution method only includes direct costs in the calculation. Indirect costs and profits are captured through the contribution margin.
Advantages:
fast
simple
Disadvantages:
risk of underpricing
requires good control over cost levels
Often used in small jobs.
The self-catering method
The self-catering method includes:
direct costs
indirect costs
risk
profit
This provides the most accurate and robust price. Standard in:
tender
large projects
public offers
2. Project and management concepts
Precalculate
The preliminary estimate is the basis for the offer and determines whether you will take the job.
Contains:
quantities
hours
direct/indirect costs
risk
margin
A good estimate makes the project manageable.
Post-calculation
The post-calculation compares the actual cost with the pre-calculation.
You see:
Where did we go wrong?
Where did we hit well?
How much profit was there?
What can be improved?
Companies that do post-calculations earn more – always.
Modification work (additional work)
Change work is work that was not planned in the contract. It must be priced and approved before execution.
Three requirements must be met:
the change must be documented
it must be accepted in writing
the price is to be agreed
Improper handling of changes is one of the most common causes of lost margins.
Deviations
Deviation means that something does not match:
drawings
contract
quality
calculation
Deviations must be identified early to avoid financial consequences.
Design basis
This includes:
drawings
descriptions
quantity basis
standards
functional requirements
Poor design basis = high risk.
Progress schedule / milestones
The progress plan governs:
resources
EU
deliveries
deadlines
A good plan prevents:
delays
double staffing
costly stops
HSE / SHA
Safety and security are a legal requirement, but also an economic factor. Accidents cost time, money and reputation.
Quality assurance (QA)
Quality assurance provides reassurance that the job is done correctly.
KS is about:
checklists
photos
control
documentation
No KS = high costs due to errors and complaints.
Rig and operation
Rig and operation are all that is needed to keep the construction site running.
Examples:
the barracks
toilets
current
scaffolding
machines
guard duty
These are costs that many people forget about in small and medium-sized projects.
3. Contract and standard concepts
NS 3420 – Descriptive texts
Used to describe performance and work in a standardized manner.
Fewer misunderstandings – better basis for competition.
NS 3451 – The building parts table
Structure for everything that is built. Used to organize:
calculate
descriptions
offer
progress
NS 3459 – FDV documentation
Especially important for:
turnkey contracts
commercial building
public buildings
Provides requirements for structure for all documentation.
NS 8405 and NS 8407
NS 8405 – execution contracts
NS 8407 – turnkey contracts
These standards regulate:
responsibility
changes
deadlines
remuneration
risk
Knowledge of these is absolutely necessary for professional bidding.
Summary – why you need to know these terms
Construction projects rarely lose money because they “do a bad job”.
They lose money because:
the calculation was wrong
risk was not priced
direct costs were underestimated
indirect costs were forgotten
changes were not handled
you misunderstood margin vs. surcharge
the momentum broke
a calculation was missing
When you master these concepts, you gain control over all phases of the project – from quotation to completion. Only then will your calculations be accurate and your margins stable.
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