Guild of Project Controls: Compendium | Roles | Assessment | Certifications | Membership

Tips on using this forum..

(1) Explain your problem, don't simply post "This isn't working". What were you doing when you faced the problem? What have you tried to resolve - did you look for a solution using "Search" ? Has it happened just once or several times?

(2) It's also good to get feedback when a solution is found, return to the original post to explain how it was resolved so that more people can also use the results.

Head Office overheads in the event of prolongation

16 replies [Last post]
Thu, 2004-09-09 00:13
Tauqeer Syed
User offline. Last seen 4 years 30 weeks ago. Offline
Joined: 22 Mar 2004
Posts: 17
Groups: Petro-Chem / Oil & Gas
Dear PPiers,
How to establish the extent of disruption and delays on the head office overheads in the event of prolongation? How to calculate the contractor’s loss of contribution to overheads (profits)?
I know, there is Hudson formula {HO overheads (profit)% X Cotract Sum x Period of delay }/(contract period x 100} ....., there is Emden’s formula (Total Overhead Cost (Profit) x 100/Total Turnover), Eichleay’s formula............But, which one is the best? and what are its limitations?.etc. Please throw some light.

Best Regards,

Tauqeer
Top

Replies

Mon, 2004-10-11 09:34
#1
Stuart Ness
User offline. Last seen 12 years 27 weeks ago. Offline
Joined: 30 Jun 2004
Posts: 352
Groups: None
Dear Asif,
Your post (correctly, I think) moves on to the negotiation stage of Claims Management, in which the Contractor should look at every aspect of his claim submission, and if he feels it necessary, he can review both the nature and extent of his heads of claim.
I agree with you that the HO Overheads section can represent a considerable slice of the cake, but it is up to the Contractor to decide – sometimes from a political perspective – as to the extent of the HO Overheads he wishes to claim.
Generally, a claim should not be inconsistent, in terms of its amount, when viewed against the background of the Contract Price.
I am a firm believer in claiming full HO Overheads where this is permitted under the Contract terms, but the Contractor is free to use his discretion to reduce the value thereof if he considers it to be appropriate. I would suggest that this principle could be applied to most if not all of his heads of claim! However, I would not be in favour of deleting the HO Overheads in their entirety as a “give away”, since it may be important to win the principle if for no other reason that you may have to apply it on another occasion later in the project!
Cheers,
Stuart
www.rosmartin.com
Top
Fri, 2004-10-01 12:38
#2
Asif Anwar
User offline. Last seen 8 years 5 weeks ago. Offline
Joined: 1 Oct 2004
Posts: 39
Groups: None
Dear Hani/Stuart

The explanation given by Stuart was quite comprehensive and clarifies on how to make the HO expenses in case of EOT claims.

But it all depends on the situation of the projects. There can by various reasons which will affect in claiming such costs which must be considered while making such claims. Let me highlight few of these.

The clients are always adamant in approving the EOT claims mainly due to the associated costs related with the time extension like the HO expenses which can really be a big amount. In such a situation if the contractor pushes hard for the extra cost like head office, he may lose the EOT claim as well.

Hence in making such claims, always prioritize, what you really want. An extension of time? Additional Costs? Your relationship with the client? As such claims may affect your relationship and make it difficult to get any new project from the client.

To summarize my lengthy explanation, look into your loss first. If the project is really in loss, then do fight for the additional cost. If you are doing well, then fight for the EOT more and let the additional cost on the back end. It does not mean that you dont have to claim. Do claim, but negotiate with them, whereby the client becomes happy to give you the EOT in return for foregoing all or some of the cost being claimed by the contractor.

I hope the above will help you a bit in future. The projects are becoming competitive and complex. We must keep the reputation of the company in the market. Otherwise you will lose the contracts in future due to some additional cost claims.

Cheers

Asif
Top
Wed, 2004-09-29 12:34
#3
Hani El Sherbini
User offline. Last seen 17 years 21 weeks ago. Offline
Joined: 7 Mar 2004
Posts: 18
Groups: None
Ness,

Thanks for the clarrification..
although it is a bit comprehensive, i would hardly suggest that you provide further detailed ones, if your time allows.

For those who does not benefit from the long or detailed postings, they do not have to read....

Thanks again Ness,


Hani
Top
Wed, 2004-09-29 06:36
#4
Jimmy robert
User offline. Last seen 18 years 48 weeks ago. Offline
Joined: 29 Sep 2004
Posts: 35
Groups: Petro-Chem / Oil & Gas
NESS

Its not my head its on my foot

Top
Wed, 2004-09-29 06:35
#5
Jimmy robert
User offline. Last seen 18 years 48 weeks ago. Offline
Joined: 29 Sep 2004
Posts: 35
Groups: Petro-Chem / Oil & Gas
NESS

Its not my head its on my foot

Top
Wed, 2004-09-29 06:29
#6
Stuart Ness
User offline. Last seen 12 years 27 weeks ago. Offline
Joined: 30 Jun 2004
Posts: 352
Groups: None
Hi Jimmy - it depends whether or not my posts make you stand on your head!!
;-)

Stuart
Top
Wed, 2004-09-29 06:17
#7
Jimmy robert
User offline. Last seen 18 years 48 weeks ago. Offline
Joined: 29 Sep 2004
Posts: 35
Groups: Petro-Chem / Oil & Gas
NESS

Refer to your sentence "just you read the first couple of lines and ignore the rest!"

plz advice first couple of lines either from top or bottom

CHEERS!!!!!!!!!!!!!
Top
Wed, 2004-09-29 06:14
#8
Stuart Ness
User offline. Last seen 12 years 27 weeks ago. Offline
Joined: 30 Jun 2004
Posts: 352
Groups: None
That’s OK, Jimmy - just you read the first couple of lines and ignore the rest!

Cheers,

Stuart
Top
Wed, 2004-09-29 06:10
#9
Jimmy robert
User offline. Last seen 18 years 48 weeks ago. Offline
Joined: 29 Sep 2004
Posts: 35
Groups: Petro-Chem / Oil & Gas
NESS

You hundred times eloborate the things but the net result is in a single line.

upto which extent you can write and write .

an advice to u plz expalin the things shortly so that one can easily understand the matter after reading two or four lines.

Top
Wed, 2004-09-29 06:10
#10
Jimmy robert
User offline. Last seen 18 years 48 weeks ago. Offline
Joined: 29 Sep 2004
Posts: 35
Groups: Petro-Chem / Oil & Gas
NESS

You hundred times eloborate the things but the net result is in a single line.

upto which extent you write and write .

an advice expalin the things shortly so taht one can easily undestand the matter.

Top
Wed, 2004-09-29 06:00
#11
Stuart Ness
User offline. Last seen 12 years 27 weeks ago. Offline
Joined: 30 Jun 2004
Posts: 352
Groups: None
Dear Hani,
When you read this message, look around you!
Look at your colleagues in the office, the computers, the office furniture, the lights, the air conditioning, the paper on your desk, the paper in the toilet, your supervisors and managers!
Who pays for all that when someone else causes you to work on the project for 15% longer??

Your Contract Price is deemed to include all the costs of executing and completing the Works, and this will include the cost of running your Head Office. If you have excusable delays (delays that are caused by the Client) then you are normally entitled to claim ALL time related costs, which MUST also include your Head Office Overheads.

Head Office, with its managers, Board Members, secretaries, cleaners, back-up and front-line departments such as procurement, expediting, engineering, human resources, transportation etc., as well as the cost of running the utilities and communication facilities in the Head Office, will have to be paid for a period that is longer than planned under the original schedule. Where these Head Office provisions have to be extended for a longer duration because of delays caused by the Client, the additional cost of these Head Office provisions will also have to be paid for by the Client.

I would suggest that the best way of claiming such HO Overheads is by using one of the formulae discussed earlier; probably the Hudson Formula.

Cheers,

Stuart
Top
Wed, 2004-09-29 00:07
#12
Shahzad Munawar
User offline. Last seen 9 years 11 weeks ago. Offline
Joined: 2 Jul 2003
Posts: 551
Groups: None
Hani

This depends upon your Contract provisions wherein states that whether these additional costs associated with EOT are payble or not?

But in mostly Contracts the Client delete this additional cost portion from EOT clause for his own ease and limited the Contractor only for EOT without any costs.

So review your EOT Clause and seek such provision of additional costs exist or not .
Top
Tue, 2004-09-28 16:32
#13
Hani El Sherbini
User offline. Last seen 17 years 21 weeks ago. Offline
Joined: 7 Mar 2004
Posts: 18
Groups: None

Dear Ness,

can head office overheads be implemented in EOT due to client delyas, this delay is almost 15% of the original duration??

if we, as contractor got EOT for client delay. can we submit along in our claim along with our site running cost, head office overhaeds???

Please calrrify..

Thanks

Hani
Top
Tue, 2004-09-28 01:57
#14
Tauqeer Syed
User offline. Last seen 4 years 30 weeks ago. Offline
Joined: 22 Mar 2004
Posts: 17
Groups: Petro-Chem / Oil & Gas
Dear Stuart Ness ,

Thank you very much indeed for your reply.

Best Regards,

Tauqeer
Top
Sun, 2004-09-19 15:23
#15
Shahzad Munawar
User offline. Last seen 9 years 11 weeks ago. Offline
Joined: 2 Jul 2003
Posts: 551
Groups: None
Tauqeer: With respect to your conditions, Hudnson is the best formula to evaluate office overheads in prologation period. "{Cotract Sum X HO overheads X Period of delay }/(Contract period x 100}" Furthermore I hereby refer NESS statement that the most important thing in this respect is to prove your actual loss incurred to your Client. If you prove the actual loss then you get your this claim at any forum.
Top
Thu, 2004-09-09 06:48
#16
Stuart Ness
User offline. Last seen 12 years 27 weeks ago. Offline
Joined: 30 Jun 2004
Posts: 352
Groups: None
Tauqeer,
The choice of formula for H.O. overheads is like a choice of beer : it often depends on where you are!
Generally (but not always!), Hudson’s is more often used in areas where the Contract is subject to UK influences, since it has been used in the UK for over 30 years.
If the Contract is more American influenced, (the Contract may, for example, refer to Change Orders rather than Variation Orders) where different accounting methods are used, then the tendency is towards using the Eichleay Formula.
The Emden Formula is sometimes used in place of Hudson’s.

None of the formulae are fool-proof, and much will depend on the party that needs to be convinced of its accuracy. Also remember that you may have to make an adjustment to reflect the HO Overheads that may already have been recovered by way of Variations/Change Orders.

Of course, it may also be that the most accurate method of demonstrating HO Overheads is simply to identify and prove the actual loss incurred by the Contractor.

It can be a complex matter, but Keith Pickavance’s book, (Delay and Disruption in Construction Contracts) does provide one of the clearest comparisons amongst the three formulae that I have seen in a while.

Need more light shed?

Cheers,
Stuart

www.rosmartin.com
Top