By Bruce Jervis
Contractors frequently speak of, and even account for, their overhead costs in a loose, generic manner. Job site or field overhead is very distinct from home office or general and administrative overhead. Yet when pricing work, contractors may apply a single percentage markup to direct costs.
There is a flaw in this approach. The methods for proving entitlement to field overhead differ from the methods for proving entitlement to home office overhead. The calculation of damages differs as well. When contractors treat overhead as a unitary item, problems arise. This was illustrated in a recent case from Ohio.
The project owner granted the contractor a 120-day extension of the performance period and a lump sum price increase to cover “extended general conditions” for that period. The contractor was delayed beyond the extended completion deadline. There was a dispute regarding overhead costs. Did the prior price adjustment establish a daily rate for field overhead, home office overhead, or both combined?
Do you always maintain the distinction between field overhead and general and administrative expenses when pricing bids or changed work? Do your accounting and job cost records reflect that distinction? I welcome your comments.