436–1 Overhead
Overhead costs are generally divided into home office over-
head costsand job overhead costs.The home office overhead
costs include items that cannot be readily charged to any one
project, but represent the cost of operating the construction
company. The job overhead costs include all overhead
expenses that will be incurred as a result of executing a spe-
cific project. The major difference between the two is that
the home office overhead costs are incurred regardless of any
specific project.
Job overhead costs constitute a large percentage of the
total cost of a construction project. The job overhead costs
can range from 15 to 40 percent of the total project cost.
Because these costs are such a large portion of the total pro-
ject costs, they must be estimated with the same diligence
and precision as the direct cost. Simply applying a percent-
age for the project overhead degrades the overall accuracy of
the estimate. If the direct portion of the estimate is quanti-
fied and priced out with diligence and precision and the pro-
ject overhead is guessed, then the overall accuracy of the
estimate is only as good as the guess of the project overhead.
Estimators must consider overhead carefully, make a com-
plete list of all required items, and estimate the cost for each
of these items.
6–2 Home Office Overhead
Home office overhead costs, also known as general overhead
or indirect overhead costs, are costs that are not readily
chargeable to one particular project. These costs are fixed
expenses that must be paid by the contractor and are the
costs of staying in business. These expenses must be shared
proportionally among the projects undertaken; usually the
home office cost items are estimated based on a fiscal year
budget and reduced to a percentage of the anticipated
annual revenue. The following items should be included in a
home office overhead budget.
Office.Rent (if owned, the cost plus return on invest-
ment), electricity, heat, water, office supplies, postage,
insurance (fire, theft, liability), taxes (property), tele-
phone, office machines, and furnishings
Salaries.Office employees such as executives, accoun-
tants, estimators, purchasing agents, bookkeepers,
and secretaries
Miscellaneous. Advertising, literature (magazines,
books for library), legal fees (not applicable to one
particular project), professional services (architects,
engineers, CPAs) not billable to a job, donations,
travel (including company vehicles not charged to
jobs), and club and association dues
Depreciation.Expenditures on office equipment, cal-
culators, computers, and any other equipment not
billed to a job. A certain percentage of the cost is
written off as depreciation each year and is part of
the general overhead expense of running a busi-
ness. A separate account should be kept for these
expenses.
Figure 6.1 is a sample of the estimated home office
cost for a general contractor for one year. The exempt and
nonexempt employees are designations from the Fair
Labor Standards Act. The most obvious difference
between these employee designations is that employers
are exempt from paying overtime to exempt employees.
Commonly these are referred to as salaried employees.
The federal statute that developed this differentiation also
goes into detail about how the job function relates to the
designation. Obviously, for smaller contractors the list
would contain considerably fewer items, and for large
contractors it could fill pages, but the idea is the same.CHAPTER SIX