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Last edited 24 Sep 2020
In accounting, the term ‘overheads’ refers to expenses that are paid by an organisation on an ongoing basis. Overheads can be fixed (i.e. the same each month) such as rent on office buildings, or variable (i.e. fluctuating depending on business activities) such as delivery costs. Overheads can also be semi-variable, where part of the expense is incurred at a fixed level and another part fluctuates, such as utility charges.
In construction contracts, overheads are often priced proportionately against a project and are the calculated costs of running the company contracted to carry out a project. Often these costs are described as head office administrative costs (in some cases there may also be factory or manufacturing overheads).
Head office costs might include; property costs, finance charges on loans, insurances, staff, taxes, external advisors, marketing and tendering activities and so on. Most contracting organisations will calculate a percentage against project costs to be set against each project somewhere between 2.5% and 5% to cover head office services.
On prime cost contracts the contractor is paid for carrying out the works based on the prime cost (the actual cost of labour, plant and materials) and a fee for overheads and profit. This fee can be agreed by negotiation or by competition, and may be a lump sum (which it may be possible to adjust if the actual cost is different from the estimate), or a percentage of the prime cost (which it may be possible to revise if the client changes the nature of the works).
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