With the more global participation in this industry has made contractors to work in severely competitive conditions to deliver projects at the minimum cost, short duration and high quality as specified in the contract. This forces contractors to make a little profit. Therefore, the only way to stay in this industry is to reduce and control costs while maintaining the work’s quality. There are many way to reduce and control overhead costs.
The most common way done by contractors in managing their overhead costs is by simply cut their overhead costs. It appears to be the easiest way but actually does not give many benefits in doing so. Simply cutting overhead costs will not make you a profit. You just cut the costs but on the other hand, it means that you cut your capabilities to make more profit. By managing them, you will make profit. Moreover, if you wrongly choose overhead costs to be cut, you may end up in a more acute situation. There are some costs which can be reduced and some cannot. To manage these costs, project managers first must think that these costs are under their control and that they are not simply existed to be reduced or disappeared.
Below are some major problems in managing overhead costs:
- All overhead costs as indirect activities are considered vital for the survival of the company or the project. Any reduction or cutting in these activities or quality will affect the company/project operation and eventually will affect the profit
- Simply cutting overhead costs will affect executive officers first (both in company and project level). This sometimes causes a defensive mechanism to appear among top level management and may cause other problems to be appeared
- Some companies lack in clear long term plans regarding business orientation. This can cause confusion regarding overhead spending priorities. The same applies to project level. Some projects do not give enough consideration in project planning.
- Overhead is mainly a time-related expenses.
And the last question is about how to manage this overhead costs. Basically it comes back to the four principles of managing project: planning, organizing, actuating, and controlling. But it is never an easy task to manage a project, especially the project overhead costs which depend on many factors. Below are some important steps which should be considered in managing project overhead costs so that it will become an effective and efficient cost management:
1. Make planning and scheduling
It is important to practicing proper project planning and scheduling in estimating overhead costs. By doing so, it will help to determine accurately the project duration and priorities which will eventually affect the overhead costs such as supervision and financing costs.
2. Understanding the distribution of overhead costs
Make a target cost or budgeting, learn the overhead priorities and necessities, etc.
3. Cutting overhead costs
Reducing the size and staff of the project, renting facilities and accommodation instead of purchasing or building them, recruiting manpower with lower wages (usually under outsourcing employment contract), sharing office with other projects, reducing equipment and plant costs by selling surplus or unneeded equipments, reducing or cancelling overtime and bonuses, etc.
4. Improving productivity
Recruiting engineers and supervisors with high capabilities and determinations, using available resources whenever possible, etc.
5. Checking and controlling overhead costs
Checking variances to evaluate progress and taking necessary corrective actions, maintain progress as schedule, etc.