Direct cost
![]() |
Direct costs for goods and services are those costs incurred directly for production and include items such as raw materials, labour, equipment, software and power costs. Direct costs can be traced and attributed to a cost ‘object’ which may be a product, department, cost centre or project.
Indirect costs (sometimes called ‘overheads’) are those necessary to keep a production facility in business and include rent, insurance, advertising and marketing which, although they may be included in the cost of the product or service, they are still indirect costs because they do not vary directly with the volume of goods/services produced and are not easily attributable to a particular process or project.
The amount added to a product’s unit costs by indirect costs will vary according to production levels, as in the following illustration:
The direct cost of manufacturing a steel padlock is £1, made up of:
The factory’s monthly indirect costs (rent, equipment, marketing etc) = £50,000
In January, the factory makes 100,000 padlocks, so the indirect cost element attributed to each unit is £0.50p.
In February, the factory makes 200,000 padlocks, so the indirect cost element attributed to each unit is £0.25p.
But in both months, the indirect costs have not changed, the only variable is in how much indirect cost is incurred by each unit.
So, indirect costs do not vary directly with production levels, whereas direct costs remain dependent on production levels and will vary when production is increased or decreased.
NB Cost prediction, Professional Statement, 1st edition, published in November 2020 by the Royal Institution of Chartered Surveyors (RICS), defines direct costs as: ‘Costs incurred on labour, material, plant and equipment, etc., i.e. costs that are directly accountable to the project.’
[edit] Related articles on Designing Buildings
Featured articles and news
Download your free guide.
Four new types of prior approval for solar developments
Online Planning Portal application types from 5 September.
Election fails to spark construction industry revival
Contract awards and planning; post election.
Making diversity and inclusion easy for SMEs
The CIOB tool for companies with limited resources.
Sustainable Futures: Redefining Retrofit for Net Zero Living
BSRIA Briefing 2024, initial speakers announced.
Looking back at the UK's first Passivhaus leisure centre
Reflections on St Sidwell’s Point with CIAT.
A-Level results and electrical apprenticeships
Electrical Skills Index highlights areas with skills shortages.
One of the world's more unusual drive-throughs.
A quick introduction.
Hadrian's Wall Path and the national trails
The trails are heritage assets in their own right.
Articles on timely advice and hydraulic lime.
Building Designers Association of Australia
CIAT and BDAA sign Memorandum of Understanding.
Built Environment Inclusive partners issue statement committed to inclusion.
Building regulation requirements can have unintended consequences.
CIOB announces 2024/25 vice president
Sustainability champion Professor Saul Humphrey.
Accelerating towards a net-zero built environment.
Comments
[edit] To make a comment about this article, or to suggest changes, click 'Add a comment' above. Separate your comments from any existing comments by inserting a horizontal line.