Overhead Cost

Topics: Cost, Management accounting, Costs Pages: 15 (4639 words) Published: April 26, 2013
Brian Eksteen1 and David Rosenberg²
¹Professor of Construction Management, Faculty of Economic and Building Sciences, University of Port Elizabeth, P.O. Box 1600, Port Elizabeth, 6000, South Africa ²Senior Lecturer in Cost and Management Accounting, Faculty of Economic and Building Sciences, University of Port Elizabeth, P.O. Box 1600, Port Elizabeth, 6000, South Africa

Costs not directly attributable to or recoverable from production and sales are often loosely referred to as overhead costs. In construction, some of these result from the organisation structure, size and form of the enterprise, some apply more directly to site operations and some may lie somewhere in between. Overhead costs largely represent the enterprise’s operational capacity, including aspects of both physical capacity such as plant and equipment and intellectual capacity such as data, records, expertise, experience and knowledge. The fluctuating nature of the construction market periodically compels enterprises, for competitive and survival reasons, to adopt shrinkage strategies. These may include retrenchments and downscaling of office and other facilities and often represents loss of capacity. When markets again expand, replacing lost capacity is problematic. Budgeting for overheads when bidding and recovering them from contract revenues in a dynamic market is a further challenging factor in optimally balancing overheads against capacity. By means of a review of literature and the results of preliminary surveys among large and mediumsized contractors, this paper presents progress on current research into managing overheads in South African construction enterprises. The objective of the project is to promote productivity through optimal management of overheads.

Keywords: construction overheads; contracting; fixed costs; management.

Unlike most manufacturing industries, the construction industry is unable, or only vaguely able, to forecast its annual business volume, client base and profit performance for any longer than a relatively short term into the future. The competitive tendering system, by which the majority of construction work becomes available to contractors, also does not assist contractors in regulating annual business volumes. Firms may experience fluctuating levels of activity, especially when upward or downward trends occur in the construction cycle or, independently of industry conditions, because of varying success in securing business by tendering or other means. A firm’s production capacity (its capability to produce goods and services) and its cost structure are inter-related. Broadly, costs are classified as fixed and variable costs, the latter being those directly incurred in producing a unit of product and therefore they vary in direct proportion to the number of units produced. Fixed costs (overheads), however, remain constant for varying levels of production volumes. Overheads to a great extent represent corporate resources and support services that apply to the firm as a whole, e.g., management, marketing, 1


Eksteen, B and Rosenberg, D (2002) The management of overhead costs in construction companies. In: Greenwood, D (Ed.), 18th Annual ARCOM Conference, 2-4 September 2002, University of Northumbria. Association of Researchers in Construction Management, Vol. 1, 13-22.

Eksteen and Rosenberg

administration, IT, data bases, records and particular skills. Resource factors such as special expertise may secure a certain competitive advantage for the firm. Construction firms are constantly faced with the dilemma of having to adjust the level of their overheads. In periods when predetermined volume targets are not reached, whether caused by low activity in the construction cycle or because of unsuccessful bidding, firms may face severe financial difficulty, even insolvency, unless they reduce overheads. This is usually...
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