How Do Contractors Bid Overhead Costs?
In the last Ideas & Insights, we discussed field and home office overhead and gave you some overhead cost examples. I think the next question is, well, how does a contractor bid these costs? How do they include these costs in their contract?
Home office costs are often bid as a percentage. If you were looking at a contractor’s bid, that percentage might be called G & A, “General and Administrative, or G, A, & M, “Administrative and Marketing.” It’s a markup percentage, or maybe a lump sum amount, that is applied to the contractor’s bid price to account for the amount of money that this project needs to generate in terms of revenue to help cover the costs of the home office.
Field office overhead costs are usually bid quite differently. They’re usually estimated, like any cost, and included in the overall price of the project based on that estimated cost. The estimator figures out how may project engineers they’re going to need and how many superintendents they’re going to need and how many non-working foremen they’re going to need. They figure out what their likely salaries are and they multiply by the number of hours or amount of time they’re going to be on the project. That becomes their estimated price for project managers and superintendents and non-working foremen. They do the same for the trailer. They do the same for Porta-Johns. At the end of the day, a contractor has priced, by estimating, what they think field office operations are going to cost.
The key here is that once we recognize this, we can understand these items affect or are affected by the change. We can properly address how we deal with them.
Scott Lowe is a Principal of TRAUNER and is an expert in the areas of critical path method scheduling, construction claim preparation and evaluation, and specification writing. He can be reached at firstname.lastname@example.org.
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