THE MANAGEMENT OF CONTRACTORS OVERHEAD COSTS Presented By DR. SADI ASSAF PROFESSOR CONSTRUCTION ENGINEERING MANAG

1. THE MANAGEMENT OF CONTRACTORS OVERHEAD COSTSPresented ByDR. SADI ASSAFPROFESSORCONSTRUCTION ENGINEERING & MANAGEMENT DEPT.,KING FAHD UNIVERSITY OF PETROLEUM & MINERALS, DHAHRAN, SAUDI ARABIA.

2. Presentation Outline Overhead costs: Definition and Types Reasons for difficulties of measuring the effectiveness of OH costs. Reasons for Increased OH costs Factors affecting Company OH costs Company factors affecting OH costs Recommendations

3. Objectives of this Lecture To increase the contractors awareness of the significance of OH costs. To identify the various factors affecting OH costs. To give recommendations on how to achieve a reduced OH costs in the construction industry.

4. Overhead cost are those charges that cannot be attributed exclusively to a single product or services. The most favorable OH level is that which allows the firm to accomplish its strategic goals at the lowest possible general expense. Overhead Cost

5. Types of OH Project OH costs Company OH costs

6. Project OH costs Project OH costs comprise the contractor�s expenses in managing the project at the job site. Major project OH costs include surety bonds, project insurance, financing cost, supervision cost, temporary constructions, repair works, equipment costs and miscellaneous costs.

7. Company OH costs It is also called General and Administrative OH It includes all costs incurred by the construction firm in maintaining the firm in business and supporting the production process but are not directly related to a specific project.

8. Reasons for difficulties of measuring the effectiveness of OH cost OH costs are created by indirect activities which are not clearly defined All indirect activities are considered essential for the survival of the company The costs of indirect activities are never accurately known Cutting of costs usually affects the executives first. Some companies lack long term plans regarding business orientation

9. Reasons for Increased OH costs Delayed payments Lack of new project Cost Inflation Government regulation Firm�s growth Client related requirements Increased spending on marketing Wrong management decisions

10. Factors affecting Company OH costs Automobile and equipment costs Head office expenses Labor related costs Financing costs Head office staff expenses Insurance costs Marketing costs

11. Company factors affecting the magnitude of Company OH allocated to Projects Contractor need for work Type of contract Number of competitors Percentage of subcontracted work Contractor�s cash availability Project complexity, location and size Payment schedule Client�s strictness in supervision

12. Recommendations Contractors need to be better informed about OH costs through short courses, seminars etc. Contractors should plan to maintain optimal levels of company OH costs Contractors should establish cost control plans to help reduce company OH costs Contractors should maintain sound safety programs to help reduce insurance costs Contractors should maintain good reputations which helps in obtaining loans at lower costs

13. Recommendations( continued) Contractors should maintain right combination of resources, which allows maximum utilization of company head office manpower Contractors and Project owners should try to resolve the problem of delayed payments in order to reduce financing costs Contractors should implement cost control measures on supervision costs, equipment costs, temporary constructions and financing costs Project owners should minimize OH related requirements in their contract documents so that project OH costs can be reduced.