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.
Why Small and Growing Businesses Need to Understand Direct Costs
They help you figure out the true cost of everything. Businesses primarily need to know their direct costs to understand how much they are truly earning (profitability). When you know the direct costs for a product or service, you can set the right price and calculate if you're making a profit. For businesses that take on custom projects or client work, knowing direct costs is crucial to ensure those projects remain profitable. Without a clear overview of the actual direct costs for each project or service, it's easy to end up losing money. They also include expenses like the materials that go into a product, or the labor directly spent on delivering a specific service or project. Understanding direct costs helps prevent losses, allows for accurate pricing, supports growth, and enables better decision-making. It's the foundation of a healthy business – just as vital as your revenue.
Direct Costs for Projects: What It Truly Costs to Finish
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
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