In this Stage the estimator must allocate the amount of the Project Overheads.
Overheads are indirect costs that remain constant regardless of the Company’s production levels.
In this Post we examine the Overheads of an Industrial
Construction and Assembly Firm, this type of Company sells or bids services for
the execution of:
New Industrial Projects.
Modification and/or Expansion of existing Industrial Installations.
Services of Inspection, etc.
What are the Overhead charges?
Overheads include, among others, the following charges:
All the salaries of the Technical, Administrative and Maintenance Personnel (not of Construction Work).
This comprises the indirect hours of the Company in the Departments of Engineering, Budgets, Quality Control, Purchases, Sales, Administration, Accounting, Finances, Legal, Cleanliness, and Security etc.
Expenses for movable and immovable property (not construction)
This covers expenditure on the acquisition and depreciation of movable and immovable property, the maintenance of movable and immovable property, the rental of buildings etc.
Office Expenses (not of Construction Work).
Expenses for inputs purchased, travel, marketing, banking services, telephone bills, electricity, gas, water, expenses, Internet, postal rates, etc.
Cost for Taxes, Insurance and Financial expenses (not of Construction Work).
Include taxes that are paid even without Works.
Includes property insurance, proposal maintenance guarantee Insurance, partners and shareholders auto insurance, etc.
Financial expenses are understood to be those incurred by a company as a consequence of the use of capital made available by third parties.
Control of Overheads.
It is indispensable to control the Overheads, if they are not properly supervised can lead to bankruptcy of the Company.
The classic example of a small company with unnecessary Overheads; is that of a Construction and Assembly Company which, from the beginning of its activities and without a Contract in sight, risks setting up a large office in the most expensive sector of the City.
In any business that starts it is prudent to spend as little as possible until the income justifies a higher expenditure.
Percentage of Overheads
To find the index of Overheads in a company, the
indirect costs listed above are divided by the direct costs in a given period
of time. This index is multiplied by 100 to arrive at the percentage in that
Each Company has its historical percentage of Overheads in a given period of time, this percentage is the one used by the estimator to allocate Overheads to new budgets.
For certain Projects, the Companies manage the amounts to assign for Overheads according to their sales policy, in order to present competitive bids.
Cost Leadership Strategy
Steps to implement a successful cost leadership
Generate a reliable and detailed Budget for each of the Projects.
Always take into account the use of the latest technological advances in the execution of Projects.
Try to optimize the performance of direct and indirect labor through incentives, training, use of special tools, etc.
To reduce Overheads to what is strictly necessary.
Provide adequate management control at each stage of the Project.
To direct the activity of the workers in the direction of favoring the reduction of costs.
Comply with the quality and safety requirements as indicated in the Bidding Specifications.
Respect the labor legislation in use, etc.