Contractors Head Office Overheads – Calculation and Recovery

 

Head Office Overheads are a part of the contractor’s costs that are usually overlooked. There are several approaches and formulas for the estimation and calculations of these overheads and expenses incurred by the contractor. No doubt, these costs cannot be directly allocated to project production; however, head office overheads are indirect costs that need to be compensated.

Similarly, compensation for additional head office overheads due to project delays is one of the most controversial construction industry issues. Not everyone is aware of head office overhead claims and costs during delays in the project. However, head office overhead is an entitled expense on the part of the contractor and needs to be compensated for.

What are the Head Office Overheads?

Head office overheads are the costs incurred by the contractor during the duration of the construction project. These costs cannot be allocated directly to a project, but are costs incurred by the contractor in support of the project. These overheads are administrative in nature and include all costs the contractor incurred in maintaining and supporting the construction work process.

Similarly, Site Office Overheads are costs associated with a particular job or project. Head office overhead costs vary from company to company but usually range between 8-15% of the total construction costs and project volume. It depends upon the size of the organization, operating costs, and management. So, make sure to consult a quantum expert for accurate calculation of head office overheads.

Some typical head office overheads include the following:

  • Rents and utilities
  • Travel costs
  • Professional fees and registration
  • Real estate taxes
  • Advertising costs
  • Depreciation of equipment
  • Office equipment and supplies
  • Legal services
  • Entertainment
  • Bid costs
  • Marketing costs
  • Non-project related insurance expenses 

According to the Mac Model Contract, these items can be made part of 8 Head office overhead categories, including:

  • Staff’s and Labours’ (Head Office) salaries and wages
  • Equipment and Plants related costs
  • Materials costs
  • Charges
  • Insurance
  • Fee Schedule Constituent
  • Vehicles and traveling expenses
  • Miscellaneous Items

Head Office Overheads Calculation

There are three most commonly used ways for calculating head office overheads and profits. The first method is the Hudson formula:

(Head Office Overheads + Profits)/ 100 x (Contract Sum / Contract Period) x Period of Delay = Head Office Overheads.

Similarly, the other method is the Emden formula:

(Head Office Overheads + Profits/ Total Company Turnover)/100 x (Contract Sum/ Contract Period) x Owner Caused Delay = Head Office Overheads.

The other most commonly used formula is the Eichleay Formula as follows:

(Contract Billing/ Total Billing for Contract Period) x Total Company Overhead During Contract Period = Allocable Overhead to Contract

(Allocable Overhead/ Days of Contract Performance) = Daily Overhead

Daily Overhead x Days of Owner-Caused Delay = Head Office Overhead.

This method is recommended as it first calculates head office overheads of the entire project and then recalculates it on a daily basis to give an accurate estimate of compensation owed. For proper estimates and calculations, consider consulting a quantum expert and avoid the headache.

Normal Recovery of Head Office Overheads

In the case of normal projects, most contracts tell the contractor to allocate overheads and profits across different items and categories, as discussed above. In such cases, the contractor needs to spread these overheads uniformly across different items in the contract. This way, these items incorporate both the costs of the work plus overheads and profits associated with that project.

This way, the contractor gets all overheads and profits into his accounts.

Recovery of Head Office Overheads in Delays

Delays are common in the construction industry. In the case of construction delays, it is obvious that the head office overheads and the total cost will increase. Therefore, in the case of owner-caused delays in the project, the contractor is entitled to compensation for extra head office overheads. For accurate compensation of owned overheads, the contractor needs to use one of the above formulas for realistic cost estimation.

We recommend using the Eichleay formula for the estimation of head office overheads in case of delays in the construction project. After getting the estimate, the contractor can then allocate these costs to the project for payment. In the case of unrecovered overheads due to delays, you either negotiate with the other party or consult a construction claims management expert and file a legal dispute.

Claim Your Head Office Overhead Cost!

Head Office Overheads are not part of direct project costs, but these costs are recoverable in all cases and certain delay situations and should be compensated for. These three formulas are the most commonly used formulas for overhead cost estimation in the construction industry. In case of owner caused delays in the project, the contractors can use any of these formulas in regards to calculating damages and additional head office overhead costs for that extra time and work required due to change orders or project delays.

So, make sure to consult a construction professional and claim all due overhead costs in all projects. No matter what formula you use, these costs are recoverable, and you have every right to include these in the project costs.