From my experience, it is not easy to measure overhead costs, especially if we are talking about project overhead costs which include company overhead costs. Let us see one by one the factors which effect these costs.
Factors affecting the company overhead costs are as follows:
1. Payments realization
Payments realization is very important for the company’s cash flow. Delayed payments may increase company overhead costs which will eventually affect the project overhead costs. Therefore, it is very important to ensure the employers in issuing payments on time.
2. Availability of new projects
The availability of new projects also affects the company overhead cost. If there is happened a shortage of new projects, the company overhead may increase for marketing purposes etc.
Inflations also can increase the company overhead costs.
Some new or changes of governmental regulations can affect the company overhead costs.
And now, factors affecting the project overhead costs are as follows:
1. Type of contract
What contract type does the project have? A lump-sum contract will give different portion of overhead costs with joint venture contract.
2. Project complexity
The more complex a project is, the more project overhead costs incurred. If you have a typical project, then you can save some expenses and this can reduce your project overhead costs.
3. Location and size
Project location and size also affect the amount of project overhead costs. If the project is executed in urban areas will have more advantages rather than countryside projects. And usually, the bigger your project, the more overhead costs incurred (by the terms of amount, and not proportion).
4. Project duration
5. Payment schedule
6. Project’s cash availability
7. Employer’s strictness in supervision or nature of the clients
8. Subcontracted work
How many percentage of the work is being subcontracted will affect your project overhead costs because usually you will spread your overhead costs in some work items. If these work items are being subcontracted, then you must bear your overhead costs more because you cannot include these costs in these work items anymore.
9. Number of competitors
10. The consultants involved
With its unpredictable nature, construction industry faces difficulty in deciding the optimum level of overhead costs that enables contractors to win and efficiently managing their projects. Since the construction industry is a multidiscipline industry, there will be many factors influencing the construction industry and eventually the project overhead. And unfortunately, these factors or activities are not yet clearly defined or accurately known. It is the major problem in measuring project overhead costs.
There are at least 3 (three) methods in measuring overhead costs. First method is by setting a percentage of overhead costs. Contractors who choose an easy way in measuring overhead costs by simply calculating the total direct costs and setting a percentage for overhead costs may end up in under or over estimating these costs. And this will affect to the accuracy of the contractor’s bidding price.
Another method that maybe used by contractors is by comparing the current project with similar projects which have been completed. Contractors may compare the similarities of project’s characteristics with other similar projects and conclude the amount of overhead costs (maybe in percentage or in a sum).
And the last method that I know is by checking contract requirements and estimating resources needed by the current project. Here, the contractors will need a particular person who has the experience to read the contract and measure the estimate expenses for overhead item. This method gives a more accurate estimation of overhead costs rather than the other two methods.
by Seng Hansen