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Last edited 28 Aug 2020
Profit and overheads on construction projects
In terms of individual projects, profit can be defined as the money the project makes after accounting for all costs and expenses. The percentage profit a contractor might apply to their tender price will vary according to risk, workload and economic climate. It can also relate to the turnover of capital employed for each project; the more times a contractor can turnover its capital on a project the more it can afford to cut margins.
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 be factory or manufacturing overheads).
Head office or administrative costs might include; property costs, finance charges on loans, insurances, staff, taxes, external advisors, marketing and tendering activities. Most contracting organisations will calculate a percentage against project costs to be set against each project somewhere between 2.5% and 10% to cover head office services.
Construction contracts will generally provide for the contractor to claim direct loss and expense as a result of the progress of the works being materially affected by relevant matters for which the client is responsible (such as instructing variations to the works).
Very broadly, contracts generally allow direct losses to be recovered (such as the cost of labour and materials), but may exclude indirect or consequential losses (such as loss of profit). There is disparity between different contract types about whether head office overheads can be included in claims for loss and expense, as it is difficult to attribute them to a specific project.
For example, there is a grey area in relation to part-time project staff who are stationed at head office and may cover a number of projects. This can lead to double accounting. As a consequence it is best to agree the allocation of such staff costs before placing orders, and if there are specific losses which the parties to the contract wish to exclude, it may be wise to ensure that this is stated explicitly within the contract.
NB: 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).
According to NRM1: Order of cost estimating and cost planning for capital building work, Main contractor’s overheads and profit, '...means the main contractor’s costs associated with head office administration proportioned to each building contract plus the main contractor’s return on capital investment. Main contractor’s preliminaries exclude costs associated with subcontractor’s overheads and profit, which are to be included in the unit rates applied to building works.'
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