Managing overheads efficiently is critical for contractors and subcontractors. One strategy often used is to shift appropriate project-specific costs into site costs by including them under “Preliminaries”. This approach keeps overheads lean, makes the OH&P add-on to tenders simpler, and ensures a fair allocation of overheads to all projects.
A useful way to think about it: if a contracting business had no work on site, it would only have overheads — comprising the costs of finding and winning work, accountants’ fees, insurances, and the office. Everything else should be a project cost.
Areas That Cause Confusion
Three areas commonly cause confusion in the allocation of costs between overheads and preliminaries:
- Roaming site staff — staff who move between projects need their time allocated accurately via timesheets.
- Site IT equipment and phones — these can be included in a staff member’s charge-out rate and allocated to the project they are working on.
- Vehicle costs — similarly, vehicle costs associated with a member of staff can be built into their charge-out rate and allocated to projects via timesheets.
How the Method Works
By including IT equipment and vehicle costs associated with a member of staff in their charge-out rate, it becomes straightforward to allocate their costs to a project — providing they keep timesheets of where they are working. Once costs and revenues are reconciled in this way, issues can be identified quickly and addressed.
One important discipline: the staff member’s timesheet hours must add up to the time they are paid for. The method is unforgiving in this respect. The costs of any staff spending more time on a project than allowed will show up immediately. It will also call into question every cost allocation — for example, having someone on a project with a van may be convenient, but if they are permanently on the same site, it raises the question of whether a van is actually required, or whether materials are not being ordered on time.
Employed vs. Sub-Contracted Staff
This method also makes it easy to compare the cost of employed site staff with sub-contracted staff. The flexibility of using sub-contracted staff only when required may well show a saving — though some would argue this comes at the expense of certainty over who is available and can impact delivery quality.
The Outcome
Using this method, contractors gain a much deeper insight into the finances of their business. Overhead percentages become meaningful and defensible. Project profitability becomes visible in real time. And the business becomes more sustainable as a result — because it is making pricing decisions based on accurate data, not assumptions.
