Direct Costs Explained Simply in One Sentence
- Direct costs are costs or expenses you can directly tie to a specific asset, product, project, service, or employee.
Where Small and Growing Businesses Need to Track Direct Costs?
Tracking direct costs helps you understand the true cost of your products or services. Small and growing businesses need to know their direct costs to see how much they are really making (profitability). When you know the direct costs for a product or service, you can set the right price and determine if you’re turning a profit. For businesses handling custom jobs or client projects, knowing direct costs is essential to keep those projects profitable. Without a clear view of the actual direct costs for each project or service, it’s easy to lose money. Direct costs include expenses like materials used in a product or the labor directly involved in delivering a specific service or project. Understanding direct costs helps avoid losses, ensures accurate pricing, supports business growth, and improves decision-making. It’s a key part of running a healthy business—just as important as your revenue.
What are Direct Costs on Projects?
Why it's important: To understand which projects are profitable and which are costing your business money. Helps prevent underpricing your services. Commonly used by: construction companies, IT service providers, skilled trades (plumbers, electricians, etc.), custom manufacturers, and marketing agencies that track expenses per project.
- Materials and supplies used specifically for a project
- Time and labor of employees or subcontractors (wages, fees)
- Costs for external services, such as shipping, equipment rental, or specialized tools
What Are Direct Costs on Assets and Equipment – Direct Maintenance and Operating Costs?
Understanding direct costs helps you determine if it's more cost-effective to repair or replace equipment. This is particularly important for manufacturing, construction, and service businesses, as well as warehouses and workshops. For assets, direct costs are typically linked to their maintenance and operation
- Repair Costs - Time, materials, and spare parts used for repairs of a specific machine
- Preventive Maintenance Costs, such as inspections, checks, adjustments, updates, cleaning, and similar
- Electricity or fuel consumption, and consumable materials
See how to track direct operating and maintenance costs for assets and equipment.
Employee Development Costs: Education, Training, and Certifications
Why it's important: To understand how much your company invests in its workforce. This helps evaluate the return on investment (ROI) for employee development. Typical for: businesses with specialized staff, technical positions, and those requiring safety or compliance training. Beyond salaries, direct costs for employees mainly include expenses for their professional growth and skills improvement.
- Employee training for specific job functions and required qualifications
- Certifications, specialized workshops, safety courses
- Travel and lodging for training or courses