Formulae for Recovery

of Head Office
Overheads
by

When do You Need to Deal with Head

Office Overheads ?
- Pricing the Tenders
- Building-up new rates and prices.
- Analysing the contract rates and prices.
- Varying the contract rates and prices.

Prof. Indrawansa Samaratunga PhD, DSc,

FRICS, FAIQS, FIQS(SL), FCIArb, FCIOB, FCMI, FIAS, FBEng,
(Arbitrator & Expert registered with Dubai International
Arbitration Centre/Chartered QS/Chartered Manager/Chartered Builder)

- Making adjustments pursuant to Sub-Clause 52.3.

- Assessing prolongation costs.

Australian Institute of Quantity Surveyors Middle East Representative

Amount of Addl. Payment

1. Delay costs due to each event:- price the contemporary records
(idle/abortive/de-mob./etc.)
- financing charges due to reduced revenue.
- loss of productivity / Subcontrs claims.
2. Prolongation costs to be apportioned to
each event:- prolonged site overheads.

under-recovery of head office overheads

- financing the additional costs.
- fin. charges due to late release of retention.
3. Show the additional payment due to each
event separately.

1.1 (g) (i)

cost means all expenditure properly

incurred or to be incurred, whether on or
off the Site, including overhead and other
charges properly allocable thereto but
does not include any allowance for profit.

(a) any extension of time to which the Contractor is entitled

under Clause 44, and
(b) the amount of such costs, which shall be added to the Contract
Price,
Engineer shall, after due consultation with the Employer and the
Contractor, determine the amount in respect of the costs of such
search incurred by the Contractor, which shall be added to the
Contract Price and shall notify the Contractor accordingly, with a
copy to the Employer.

Terminology Contd
- idle/abortive/de-mob./etc.
- financing charges due to
reduced revenue.
- loss of productivity.
- Subcontractors claims.

= 100,000
=
=
=

20,000
50,000
90,000

- late release of Retention.

10,000

- prolonged site overheads.

- financing addl. funds reqd.

= 300,000
= 30,000

OH & P

600,000
10% = 60,000

OH & P

Head office Overheads & Profit

Gross Profit

Head office Overheads & Profit

Site Overheads

Preliminaries etc.

General overhead costs

Head office Overheads

Off site overhead charges

Head office Overheads

HOOH

Home office Overheads

FOOH

Field office Overheads

= 660,000

If, on the issue of the Taking-Over Certificate for the whole of the
Works, it is found that as a result of:
(a) all varied work valued under Sub-Clauses 52.1 and 52.2, and
(b) all adjustments upon measurement of the estimated quantities set out
in the Bill of Quantities, excluding Provisional Sums, dayworks and
adjustments of price made under Clause 70,
but not from any other cause, there have been additions to or deductions
from the Contract Price which taken together are in excess of 15 per cent
of the Effective Contract Price ( which for the purposes of this SubClause shall mean the Contract Price, excluding Provisional Sums and
allowance for dayworks, if any) then and in such event ( subject to any
action already taken under any other Sub-Clause of this Clause),
..... there shall be added to or deducted from the Contract Price
such further sum . having regard to the Contractors Site and
general overhead costs of the Contract ... Such sum shall
be based only on the amount by which such additions or deductions
shall be in excess of 15 per cent of the Effective Contract Price.

What Constitutes the Head Office Overheads ?

- Executive and administrative salaries, allowances & recruitment.
- Head office rent and maintenance.
- Insurance (except contract insurance)
- Utilities, phone, fax, IT and bank charges.
- Depreciation of company assets.
- Furniture and equipment. - Stationary and printing.
- Travel.
- Professional fees.
- Auditing expenses.
- Advertising and marketing (tendering costs)
- Interest on company borrowings (except project financing).
- Bad debt.
- Entertainment. - Pantry expenses.
- Contributions. - Sponsorship fees.
- Idle resources (except contract related)
- Training.

HEAD OFFICE OVERHEADS

1,000,000

x 12

= 12,000,000
12
= 240,000,000
0
3
= 48,000,000 x 5

10
5%

Original
Completion

4,000,000

Contract Price X H.O. %

X Period of Delay

Time for Completion

Alfred Hudson

1891

2nd
3rd
4th
5th
6th

FINISH

Alfred Hudson, KC 1926

Lawrence Mead
1933

7th

300,000
400 d

1st

CP
40 M

30 d

40,000,000

X 10%

8th

E.J. Rimmer, QC and

I.N. Duncan Wallace 1959

9th

I.N. Duncan Wallace 1965

X 30 d

400 d

HUDSON FORMULA
H.O.&Profit%
Contract Sum
x Period of Delay (Weeks) =
x
100
Contract Period (Weeks)

HUDSON FORMULA
Additional
Payment due

H.O.&Profit%
Contract Sum
x Period of Delay (Weeks) =
x
100
Contract Period (Weeks)

Additional
Payment due

(where :

(where :

H.O.&Profit % = the percentage of Head office Overheads and Profit

allowed in the Tender/Contract)

H.O.&Profit % = the percentage of Head office Overheads and Profit

allowed in the Tender/Contract)

Notes :-

Notes :-

a) Instead of weeks, the periods may be expressed in days where appropriate.

a) Instead of weeks, the periods may be expressed in days where appropriate.

b) The Contract Sum shall be construed as the Contract Price.

b) The Contract Sum shall be construed as the Contract Price.

c) The Contract Period should be considered as the Time for Completion.

c) The Contract Period should be considered as the Time for Completion.

AOP is shown in bold font.

AOP is shown in bold font.

EMDEN FORMULA
h

100

EICHLEAY FORMULA

Contract Sum
x Period of Delay (Weeks) =
Contract Period (Weeks)

Additional
Payment due

Step 1.

Contract Billings
Total Contract Billings

Total Head Office Overheads

Allocable
=
for the Contract Period
Overhead

for the Contract Period

(where :
h = head office percentage arrived at by dividing the total overhead cost &
profit of the Contractors organization as a whole by the total turnover.

Notes :-

Step 2.

Allocable Overhead
Days of Performance

Step 3.

Daily Contract Head

Office Overhead

Daily Contract
Head Office Overhead

Days of Compensabl e
Delay

Additional
Payment due

a) Instead of weeks, the periods may be expressed in days where appropriate.

b) The Contract Sum shall be construed as the Contract Price.

Notes :

c) The Contract Period should be considered as the Time for Completion.

a) Both Contract Period and Days of Performance

are taken as from Start to Finish of the project.

AOP is shown in bold font.

b) AOP is shown in bold fonts.

Other Formulae

HANK LAAN FORMULA

Contract Billings
Total Company Billings

TotalHead Office Overheads

(during the period of delay )

Additional
Payment due

1. Modified Eichleay Formula Variation 1. (OCP)

2. Modified Eichleay Formula Variation 2. (OCP+EOT)
3. Ernstrom Formula. (Labour cost proportion)

Notes :

4. Manshul Formula. (Total cost proportion)

a)

5. Carteret Formula. (Excess overhead rate basis)

This is a direct apportionment without

reaching the intermediate stage of AOP.

6. Allegheny Formula. (Excess rate and apportionment)

Hx

CP
SCP

Additional
Payment due

where :

Actual
Date of
Completion

Original
Date for
Completion

100 M 100 days

20 days

20 M
20 M

100 M 100 days

Actual total overhead cost of the Contractors Head Office

during the period of EOT of the delayed project.

CP

Contract Price of the delayed project divided by its original

Time for Completion, and multiplied by the period of EOT

SCP

Commenc-ement
Date

SAMARATUNGA FORMULA

Sum total of Contract Price of each concurrent project

divided by its original Time for Completion, and multiplied by
the whole or part period of EOT (of the delayed project)
through which it was in progress, taking into consideration all
projects in progress at the time, including the delayed project.

10 M

40 M 80 days
40 M 80 days

2M
4 days

50 M 25 days

12 M
6 days

640,000/=

64 M

20 M
64 M

= 200,000/=