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'Project Specific' Overhead Recovery

Updated: Sep 30, 2023

NZS3910 misrepresents Overheads as ON SITE, or OFF SITE...

Our definitions are clear, but our terminology is misleading.

The NZS3910 definition for ‘On-site Overheads’ would be far easier to conceptually grasp, if it was renamed “Project Specific Overheads”. Being expenses to establish temporary infrastructure, provide project specific management and administration, whether these are located on-site or off-site.

All the way through NZS3910 standard terms, and specifically section 9.3 valuing variations, 'On-site Overheads' and 'Off-site Overheads & Profit' are mentioned over and over again. If you do not constantly refer back to the definitions section, you will start to think these are both overheads, that are solely differentiated by their location relative to the boundary fence, surrounding the Site. i.e. defined and differentiated by their location alone.

Equally ‘Off-site Overheads’ is a somewhat misleading term. Some ‘Project Specific Overheads’ (falling within the definition of ‘On-site Overheads’), are based off site, at head office, like project managers and administrators. They are Overheads, they are located off site, but they are NOT Off-site Overheads by definition. ‘Off-site Overheads” would be better renamed ‘Company Non-project Specific Overheads’.

The definitions for 'On-site Overheads' and 'Off-site Overheads' are not governed by their activity location, but are based on their function relative to the general overall running of either;

(a) The Contract Works specifically; or

(b) The Company Generally, (and not required for the carrying out of any specific Contract Works).

PM Workload Allocation, Visibility = Perception…

When the project manager has 5 projects to run concurrently, each project has a variable workload subject to prioritisation or 'triage' of any issue competing for PM time. It is unlikely the PM will expend precisely 20% of their time, each day, week, or month equally on each project. Overall, the 5 projects will consume the PM’s capacity limit. While each of those 5 projects are running, the PM cannot pick up a new project to run, until an old one finishes. Workload balance between projects is not uniform or linear but lumpy, focused on ever changing priorities.

The part time PM is less visible than the full time PM and the off site PM is less visible than the on site PM. It is very easy to include 100% of a full time, on-site based PM, into a working day rate calculation. The part time, off-site based PM, has less visible presence, if they are on-site 25% of the 20% of time they spend on average on your project, you tend think they were only working on your project 5% of the time, when assessing a project that is in delay. The fallacy is that to draw this 5% analogy, requires you to consider that the part time PM is running 20 projects all concurrently. Q. how many projects does the PM's company run concurrently, and how many project managers do they employ?

The Reality of a Delay effect on Project Specific Overheads

With any delay, there is no alternative way to recover overhead cost than to charge for it as a reasonable actual cost to the project. Project Specific Overheads are a long term commitment to a project. Productive site or off-site resources can be reallocated to other projects, where there is always more scope to fabricate, assemble and install.

When it comes time to 'Extension of Time' claims, you start to question the 20% project specific allocation. Can we have a copy of your time-sheet? What were you actually doing on our project during this period? These questions miss the point, an 'Extension of Time' claim can be about;

(1) additional scope of work, which obviously requires addition time and addition PM resource during the period of delay, or

(2) a delay to current scope of work, due to the effects of a Principal default deemed to be a variation, not affecting scope quantum, and while the productive staff are reallocated to other projects, the additional Project Specific Overhead costs incurred are out there whistling in the wind, looking for a someone to pay their wages?

[1] EoT for addition scope; PM resource recoverable as an additional cost incurred.

[2] EoT for access or information delay or disruption; PM resource recoverable as a loss arising from the inability to recover elsewhere.

Either way, when we correct our terminology, 'Project Specific Overheads', roll on relentlessly, and must be recovered.

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“Celebrating 50 years of New Zealand Building Economist 1972 to 2021”

By Matthew Ensoll


Editor New Zealand Building Economist.



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