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Tips on “PROFIT AND OVERHEADS” in construction practice.

Contractors charge for Profit and Overheads on works requiring repair or new construction projects

(building or civil or the like in the construction industry).

Profit and Overhead (P & O) covers a Contractor!s ti"e and e#penses and is calculated as a percentage

of the total cost of a project (or provided within the cost of the project).

Overhead costs are operating e#penses for necessary facilities. Profit is what allows the Contractor to

earn their living.

Overhead or ead office overheads include those costs of the contractor!s business that cannot be

charged to a particular contract$ but are e"ployed to oversee all of the projects that the co"pany is

engaged in$ plus the tender "anage"ent functions for the future projects.

%hey are an indirect cost of the business$ these includes the following• ead office "aintenances and running costs

• 'ents ("ay include those of branch offices and workshops and the like)

• alaries or wages

• Costs of "aintenances of co"pany!s assets (depreciation costs on assets)

• egal fees (business license$ statutory fee for operations and the like)

• *nterest on loan (servicing the loans)

ence in practice the head office overheads are distributed to all the contracts (tasks or projects) in hand

or in progress at the contractor!s office. ead office overheads thus can be categori+ed as function of

ti"e as well as function of costs.

On the other hand$ factors that control the profit are such of the following

• Cash flow of the said project and the overall cash flow of the co"pany

• ,egree of risk anticipated in all projects in hand or e#pected by the

• -ini"u" level of profit required by the directors

• /%

ead office overheads and profit are unlikely to be spread across the entire project at the sa"e rate.

Putting in "ind that$ the contractor rely "uch on cash flow to pay the overheads (bills$ salaries$ wages)and unless advance pay"ent is applied$ the contractor is likely to be in a negative cash flow for the

"ajority of the project$ as he receives pay"ent after incurring costs on site (refer co""on practice in

%an+ania).

Of great interest$ contractor "ay choose to have higher profits in the early trade such as "obili+ation or

e#cavations or earthworks than in the later trades such as decorations. 0ut if the contractor will not

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consider the project to be risk subject the two (P & O) will be distributed equally throughout the

 project.

POINT OF FOCUS

%he Contractor "ay lower its Profit as "uch as he decides but he cannot te"per with the Overheads as

these cost tend to be fi#ed (as e#plained before).

ence the questions whether Profit should be lower or higher than the Overheads depend on the

strategies of the contractors and econo"ies (financial capabilities of the co"pany and the like)

surrounding the projects under contract.

*f truth be told$ "ost of the contractors are wrong to treating the ead office overheads as percentages

for certain work or contract$ as they cover a wide range of ite"s which differ in "any ways and have

different i"pact on the overall practice of the co"pany.

Contrary to the Profit which is based upon various decision and can be easily controlled ("a#i"i+ed or

"ini"i+ed) by various factor as "entioned before.

1or si"plicity the 2 are co"bined as a percentage but one should real focus upon their actual i"pact on

either a rate of a work or a whole project.

%he relationship between profit and overheads is "erely in the theory$ in practice the two concepts differ

in "any di"ensions. 1or e#a"ple there figure for profit could range fro" 3* to 45 per cent depending

on how badly the contractors needs the work$ level of co"petition$ degree of risk and the willingness to

work for a particular client.

ence there is a close relationship between 6,ecision to %ender7 and the a"ount of 6Profit7.

WHO NOWS E!ACT"# A$OUNT OF OVERHEADS%

%he contractor!s accountant is the one who has the responsibilities of "anaging all the e#penses of the

head office and thus the one who has a great knowledge upon the a"ounts of overheads. 1or si"plicity

literatures have suggested that the percentages of overheads as

Overheads 8 9 /ccountants esti"ated and calculated overheads

/ccountants co"pany!s esti"ated turnover 

 WH# EARN THE PROFIT%

:. 1or co"panies under the "any shareholders the only way to provide for dividends is to produce

 profit which will be the returns to the risk invest"ents the shareholder have put into the

co"pany.

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2. ;rowth$ business diversity$ increase or pro"otion of staff and increase of turnover are achieved

 by the profit the co"pany "ake in each endeavor.