Why Overhead?


Overhead costs can be defined as indirect expenses that cannot be charged to individual costs or bid items. It covers items such as directors’ fee, secretariat’s fee, marketing’s fee, general equipment costs, etc not only for project necessities but also for headquarters necessities. Therefore we can divided the overhead costs in 2 (two) types: project overhead and company overhead. Usually overhead costs are expressed in percentage of total direct cost and which then will be added into the contractor’s tender price. And since it cannot be charged as an individual cost, we cannot find this item in Bill of Quantities.

Another characteristic of overhead cost is that it will benefit more than one cost objective. So basically overhead is a summary of expenses which then will be used for the activity of some other works, not a cost which is used only for a particular work item. With this characteristic, overhead cost is usually spread to some related work items. Although these costs are not a component of the actual construction work, they have significant roles to support the work. Total overhead costs may vary from 10-30% of the total direct costs, depending on the project characteristics and company’s objectives.

As what I said earlier, there are two types of overhead costs; first is project overhead cost and the other is company overhead cost. Project overhead cost is the costs specific to a project, incurred for the sake of the construction process and execution. The examples of these project overhead costs are project administrative expenses, project office rent and utilities, project office supplies, project team’s salaries and bonuses, depreciation on project office equipments, taxes, bonds and insurances, the cost of rework, etc. While company overhead cost is all costs incurred by the construction firm in maintaining the business and supporting the production process, but are not related to a specific project. Office supplies, directors and company staff’s salaries and bonuses, depreciation on office equipments, company’s licenses, company’s advertising and marketing costs, training held by the company, etc are some of the example of this type. Unlike company overhead cost, the project overhead cost can be estimated in somewhat accuracy by checking and examining carefully all of the contract conditions and work’s specifications in a particular project. If the contractor or the Project Manager (with the help of a quantity surveyor) can do this estimation precisely, the project overhead costs can be determined in some accuracy, excluding the other unforeseen factors such as variations and force majeure. By doing this, hopefully the contractor’s team can manage their work and gain some profit accordingly.

While the company overhead cost is perhaps one of the main reason why there are so many contractors’ team cannot make a profit in their works. The company overhead costs will be charged into projects and usually it will effect to the project’s cash flow significantly. Here, it means that a project must bear two overhead costs; one from the project overhead costs itself and the other is from the company. Neglecting overhead costs can be a nightmare for Project Manager and his team because these costs constitute a significant portion of the total construction cost. What may be a profitable project can turn into a losser one.

 

Seng Hansen

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