Definition

In an APC context, costing of resources means identifying, measuring and allocating the costs associated with the people, equipment, time and overhead consumed in delivering professional services. Effective costing enables a surveying practice to set appropriate charge-out rates, bid competitively and monitor whether individual projects are profitable. Cost information also underpins statutory financial statements under the Companies Act 2006 and FRS 102, particularly the distinction between direct costs (cost of sales) and indirect costs (overheads) in the profit and loss account.

Why this matters for Accounting Principles & Procedures

  • Level 1 knowledge: you must distinguish between direct and indirect costs and explain how they are allocated in a professional services firm.
  • Costing is the foundation of pricing: a practice that systematically under-costs its services will erode margins even as fee income grows.
  • Understanding overhead allocation allows candidates to explain how charge-out rates are set and why they vary between staff grades.
  • Project cost monitoring is a routine responsibility for surveyors managing instructions; identifying cost overruns early and escalating them is a core competency.
  • Costing knowledge supports budget construction and fee proposals, both of which are assessed under this competency.

Key principles

Direct and indirect costs

Direct costs can be attributed to a specific service, project or client: fee earner time, specialist subcontractors, mileage and materials. Indirect costs (overheads) support the business as a whole: office rent, IT, non-fee-earning staff salaries and professional indemnity insurance. Overheads must be recovered across all instructions through the charge-out rate; direct costs are typically billed to the client or absorbed within the project budget.

Absorption costing

Absorption costing allocates all costs, both direct and indirect, to units of output. In a surveying practice the unit of output is typically a billable hour or completed instruction. The overhead absorption rate is calculated by dividing total overhead by planned billable hours. If actual activity exceeds the plan, overheads are over-absorbed and profit improves; if activity falls short, they are under-absorbed and margin is eroded.

Marginal costing and job costing

Marginal costing charges only variable (direct) costs to a unit of output; overheads are treated as period costs. It is useful for short-term pricing decisions where fixed costs are already covered, but should not be used for routine pricing as it leads to systemic overhead under-recovery. Job costing allocates actual costs to individual instructions through time recording; fee earner hours are logged against each instruction and valued at the cost rate, enabling comparison with the fee estimate throughout the life of the project.

Relevant RICS guidance and legislation

  • Companies Act 2006 — requires UK companies to prepare accounts giving a true and fair view; accurate cost allocation is essential to meet this standard.
  • FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (Financial Reporting Council) — the distinction between cost of sales and administrative expenses in the P&L requires systematic cost allocation.
  • RICS Rules of Conduct (effective 2 February 2022) — Rule 2 (competence) requires members to have adequate knowledge of the financial management of their business, including costing and pricing.

Ethics and Rules of Conduct angle

Rule 1 of the RICS Rules of Conduct (honesty and integrity) requires members to be transparent about fees. A practice that presents a fee proposal without understanding its true cost base risks either underpricing (damaging the firm) or overpricing without justification (damaging the client relationship). Accurate costing also supports Rule 5 (acting in the public interest): a practice must remain financially sustainable to deliver the standard of service clients are entitled to expect.

APC-style Q&As

Q (Level 1)What is the difference between a direct cost and an overhead in a surveying practice?

A direct cost can be attributed to a specific instruction, for example the time a fee earner spends on a valuation or mileage incurred visiting a site. An overhead supports the practice as a whole and cannot be attributed to a single instruction, for example office rent, IT costs or the office manager's salary. Overheads must be recovered across all instructions through the charge-out rate.

Q (Level 1)What is absorption costing?

Absorption costing allocates all costs, both direct and indirect, to units of output — typically a billable hour or completed instruction in a professional services firm. An overhead absorption rate is calculated by dividing total overhead by planned billable hours; this rate is added to the direct cost of each instruction so that every piece of work bears a fair share of fixed costs.

Q (Level 2)How does time recording support job costing in a surveying practice?

Fee earners log their hours against each instruction; each hour is valued at the fee earner's cost rate (total employment cost divided by available hours). Actual costs can then be compared to the fee estimate throughout the instruction. If an instruction is tracking over budget on time, the manager can intervene early — either to control costs or to discuss scope with the client — rather than discovering the overrun only at completion.

Q (Level 2)When would you use marginal costing rather than full absorption costing to price a piece of work?

Marginal costing is appropriate for short-term, one-off decisions where fixed overheads are already covered by existing work. For example, if the practice has a quiet period and a client requests a small additional instruction that can be fitted around existing commitments without increasing fixed costs, any fee above the marginal cost generates a positive contribution to profit. It should not be used for routine pricing, as this would result in overheads being systematically under-recovered.

Q (Level 3)A lease advisory instruction was budgeted at £15,000 but has already cost £19,000 with work still to complete. What steps would you take?

(example) My first step would be to understand why the overrun occurred: was the estimate too low, has scope expanded without a fee variation, or has the work taken longer due to complexity? If scope has expanded, I would review the fee letter and prepare a supplemental fee proposal before completing additional work. If the overrun reflects internal inefficiency, I would note it for the post-instruction review. I would update the WIP record so the P&L reflects the current position, and consider writing down the recoverable amount of WIP if a fee increase is unlikely.