The construction project is managed by the contractor’s organization which won the project through a competitive tendering is quite common in the construction industry. The term competitive tendering represents a process through which a bidder who offered the lowest price for meeting the project requirements would be chosen to award the contract. This is mainly to ensure the best value for money and is a prevailing practice in the public sector projects where the government is responsible to taxpayers, this is a crucial matter to consider.
The term “Overhead” denotes expenses (Ongoing business expenses) that any organization will incur to support its business operations other than the direct cost resulting from carrying out any specific activity or product/project that the organization has undertaken as a core business.
In the construction industry, construction companies are normally establishing offices to operate their construction projects undertaken in different places. The operation of head offices (corporate offices) will require facilities such as buildings, cars, water, electricity, office equipment, staff, insurance, etc. The cost arising from these operative requirements is different from the cost arising from the execution of construction projects. The project cost will also include certain operative costs in addition to the direct cost arising from the real construction. These need to be taken into consideration when pricing a tender.
In construction, when pricing a tender, the overhead costs will be added as a percentage to the sum of the basic cost estimated from the works. It is appropriate to understand the different types of costs that we deal with in the business. The cost arising from the works is called direct cost, whilst the cost arising from the overall operation of the company is called indirect cost. The sum of indirect costs incurred by the contractor’s organization will need to be distributed/shared among different projects undertaken by the company. The direct cost for construction is made up of materials, and direct labor including subcontractor cost, and plant. These resources are assessed specifically for each activity, e.g., resources required for the construction of an underground manhole, such as labor, plant, material, and subcontractor will be assessed by the estimator considering the average productivity achieved in the past including the factors/conditions that are to be dealt with in the project.
Although it is a direct cost, taking into consideration the overall cost including the indirect cost (overhead) and profit, the direct cost will often be called the basic cost of each activity. The basic cost will become a unit rate for any activity when the activity’s basic cost is added with a sum covering the overhead and profit.
The overheads are generally categorized into two, (i) general overhead or indirect costs, and (ii) Job overhead or direct costs.
The general overhead is alternatively called indirect cost as the cost is not chargeable to any particular project or activity. These costs constitute the contractor’s organization’s cost of doing business and any fixed costs that are incurred. The general overhead costs/expenses will typically include the following:
- Office expenses (rent or lease cost, etc.)
- Staff salaries (Managing Director, Personal Manager, Company Finance Manager, etc.)
- Depreciation cost (annual percentage written off of office equipment, office cars, or any other equipment being used for general purposes)
- Legal fees, marketing, and advertising costs, etc.
The above items are not comprehensive and to avoid missing overhead items, it is appropriate to list all general overheads of the company for proper pricing.
Also, at the Site level, certain indirect costs (Job overhead costs) that are not attributable to any particular activity level include staff salaries, costs associated with site offices, temporary facilities, performance guarantee, insurance, staff salaries (foreman, project manager, Quantity Surveyors, Office engineers, etc.), temporary utility cost, etc. These are generally called as Preliminaries and General Items and the Contractor will be provided with an opportunity to include these job overheads in its pricing.
The risk of not considering appropriate Overhead cost in the tender price, would affect the financial status of the company down the line.
