Reducing overheads by the reallocation of costs

Managing overheads efficiently is critical for contractors and subcontractors. One strategy often used, is to shift appropriate project-specific costs into site costs by including them under "Preliminaries." This approach helps keep overheads lean. The OH&P add-on to tenders is then simple and there is a fair allocation of overheads to all projects. Understanding what goes in each heading focuses the mind. Essentially, if a contracting business had no work on site, they would only have overheads, comprising of finding and winning the work, accountants fees, insurances and office.

Areas which can cause confusion are:

·      Roaming site staff

·      Site IT equipment and phones

·      Vehicle costs.

By including IT equipment and vehicles associated with a member of staff in their charge out rate, it becomes easy to allocate their costs to a project, providing they keep time sheets of where they are.

By then reconciling costs and revenues, issues can be identified quickly and addressed. One thing which must be captured is that staff members' time from their timesheets adds up to the time they are paid. The method is unforgiving in this respect. The costs of any staff spending more time on a project than allowed will show up. The method will call into question every cost allocation, e.g, having someone on a project with a van may be convenient but if they are permanently on the same site, it will cause the question to be raised as to why a van is required. Is it because things are not being ordered on time, or that the site is not accessible any other way? The cost of employed site staff and sub-contracted staff can be easily compared. The flexibility of using sub-contracted staff only when required may well show a saving but some would argue at the expense of being sure who is available and can impact on quality of delivery.

Using this method, clients of mine have obtained a deeper insight into the finances of the business which has led to a more sustainable business. If you would like help with sorting out how to scrutinise preliminary costs, please contact me. Peter.Searle@ba4cs.co.uk