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ConstructionPro Week, Volume: 4 - Issue: 10 - 03/13/2015

Should Field Overhead Always Be Priced as a Percentage?

By Bruce Jervis

 

Jobsite overhead, sometimes called field office overhead, is not really “overhead” at all. It is a direct cost of performing a single construction contract at a specific site. Nonetheless, the term “overhead” is widely used and the Federal Acquisition Regulations allow government contractors to treat it as an indirect, percentage-of-contract cost component when pricing change orders.


Contractors are also allowed to treat jobsite expenses as a direct, per diem cost when pricing change orders. This creates a potential problem. As one contractor recently learned, there must be consistency in accounting practices.


A contractor cannot price one change order proposal treating jobsite expenses as a direct, per diem cost and then, on the same contract, price another change order proposal treating job site expenses as an indirect, percentage-of-contract cost. Even if the per diem rate was disadvantageous and inadequate to cover actual job site expenses, the contractor was stuck with its initial cost structure.


This raises some interesting questions. Should jobsite expenses always be priced as a percentage of contract cost? Is this the more prudent, best practice? Or, if carefully itemized and calculated, is a per diem rate the more accurate way to price these expenses? Your opinion is welcomed.

 

 

COMMENTS

"As one contractor recently learned..." - Could you share the case or situational facts here? I would be interested in researching the intricacies of this topic.

Thanks.
Posted by: Taylor Benson - Friday, March 13, 2015 1:26 PM


I agree with Taylor Benson, having a citation to the case would be helpful because I can conceive if several arguments. I too would like to research this issue.
Posted by: Paul Davis - Friday, March 13, 2015 2:07 PM


We are very immersed in federal contracting and the nuances of the FAR. There are some real traps for contractors when they price a change and they use a different method than was used to initially calculate their bid/proposal price. Again like the others there is not enough information to form an opinion.
Posted by: Ronald Vietmeier - Friday, March 13, 2015 3:44 PM


At the beginning of a contract, it's a good idea to calculate and propose a daily job site overhead rate, for bilateral agreement with the owner/agent, for change order purposes. This process captures the specific as-bid/as-awarded job site general conditions costs allowing for a reasonable and equitable markup. A generally accepted practice is to negotiate main office overhead & profit, as a percentage, on the change order amount.

However, if a total suspension of work occurs it's prudent to have a calculated home office overhead percentage that the suspended project represents of the company's total contracted workload.

If these calculations are generated beforehand, it simplifies the negotiating process, as it may occur.
Posted by: Phil Howry - Friday, March 13, 2015 5:05 PM


What you refer to as "field overhead" and others describe as indirect costs, general conditions, general requirements, soft costs, and other confusing terms should NEVER be calculated as a percentage as it is predominantly made up of cost items dependent upon the duration they are required / applied.
Posted by: William Kraus - Monday, March 16, 2015 7:09 AM










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