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The Universal Overhead and Profit Recovery Formula (For Head & Sub Contractors Equitable Recovery)

Updated: 2 days ago

NZS3910:2013 does not prescribe how to calculate a Working Day Rate but it does guide you to include 'Time related costs', and as you cascade through Variation valuation rules in subsection 9.3, where a WDR is not expressly allowed or where it is allowed for but considered inequitable (WDR), a reasonable rate shall apply.


The classic static Working Day Rate, a failure of average proportions


The classic static Working Day Rate is only an indicative guide to what a reasonable working day Rate might be, on a case-by-case basis.


If a project cashflow graphs as a straight line from the bottom left to the top right, then the average Working Day Rate will always be equitable throughout the course of a project.


But if a project cashflow graphs follows a Michael Mann global warming hockey stick, with a low, slow, grind for 80% of the project from the bottom left, followed by a steep rise to the finish to the top right, then the average Working Day Rate will almost never be equitable, given the highly variable nature or circumstances that occur naturally throughout the course of a project, when any particular Variation with Time Related Costs occurs.


The pattern of most project cash-flows, from month to month, are best described as “lumpy”, or inconsistent with any lazy projected average.



The Proportionality Lesson from COVID Lock-down caused Extensions of Time


Any given project only needs to recover its share of the Off-site Overhead burden at the time a delay occurs.


Across a portfolio of projects, only some will return the project average, the majority will recover fractions less or multiples more than average. To apply average to these customers, is inequitable.



The Universal Working Day Rate, Formula Method


It is easy to calculate your company Off-site Overheads + Profit as a % ratio of company annual turnover.


If Off-site overheads + Profit are @ 10%pa then for every $100k per month turnover, $10,000 Off-site Overhead + Profit is recovered. Assume 20 working days per month, then $10,000 / 20 = $500 per working day per $100k turnover per month.


Principle Formula;

Turnover/month x OH% / 20WD’s/month = $/WD



Example of a Off-site Overhead + Profit (Margin), Universal Working Day Rate (UWDR) for


Off-site Overheads + Profit @ 10%pa is $500/WD/$100K TO/Month.

Off-site Overheads + Profit @ 8%pa is $400/WD/$100K TO/Month.

Off-site Overheads + Profit @ 5%pa is $250/WD/$100K TO/Month.

Off-site Overheads + Profit @ 3%pa is $150/WD/$100K TO/Month.



Example for Off-site Overheads + Profit recovery @ 10%pa with Variable monthly turnover


Monthly Turnover $400,000. EoT WDR = 4*500 = $2,000/WD

Monthly Turnover $1,000,000. EoT WDR = 10*500 = $5,000/WD (project average)

Monthly Turnover $1,500,000. EoT WDR = 15*500 = $7,500/WD



Example for On-site Overheads (P&G) @ 10%pa


On-site Overheads, (P&G), while more stable month to month, also can be subject to the same principle that it varies as a time related cost when recoverable.


The principle expressed above can be applied to On-Site Overheads. Divide the Sum to be recovered for P&G per month by 20 (ave) working days per month, to arrive at a Working Day Rate applicable at the time a delay event occurred. Example $80,000 per month / 20 working days per month = $4,000/WD Working Day Rate. (Or you can use the actual working days relevant to the actual month under consideration. Working Days per month can vary from 17 to 23.)


While you are more likely to have a consistent monthly P&G, it can vary through phases of the project where P&G resources vary. E.g. structure phase has a tower crane, fit-out phase has a tower crane and additional fit-out supervision, closed in completion phase does not have a tower crane but still has fit-out additional supervision.


Example Universal Overhead and Profit Recovery Formula


Variable monthly turnover examples;

Monthly Turnover $400,000. Off-site OH+P $2,000/WD + On-site OH $4,000/WD = $6,000/WD

Monthly Turnover $1,000,000. Off-site OH+P $5,000/WD + On-site OH $4,000/WD = $9,000/WD

Monthly Turnover $1,500,000. Off-site OH+P $7,500/WD + On-site OH $4,000/WD = $11,500/WD


Subcontractor Time Related P&G and Margin Recovery


There is more to a WDR than just Head Contractor P%G and Margin. Subcontractors have the same time related costs to recover when an extension of time applies to their works. The Head Contract WDR recovery method does not account for Subcontractors time related costs also. See "Head Contractor WDR excludes Subcontractor Time-related Costs"


'Relevant' Subcontractor On-site OH (P&G) + Off-Site OH + Profit (Margin) can be added to Head Contractor formula using the same principle formula @ ratios agreed when sublet.


Not all subcontractors are delayed when the head contract is delayed. Example (1) Piling or Structural Steel or other early trades may be completed, or (2) an active trade may not be on the Head Contractor critical path to complete its remaining works. So 'relevant' allows us to reason which subcontractor trades should be included in any specific Variation with Time Related Costs, taking into account which of the highly variable nature or circumstances are prevailing at the time.


Application of the Equitable Rule


Dear Principal's and Engineers to the Contract, if a Head Contractor provides you with a classic static WDR, they have done so in context of clause 9.3.12. Where a working day rate has been nominated and the nature or circumstance of the Variation are such that it would be clearly inequitable to use the nominated rate, then a reasonable rate shall be used. Variations are never reasonably foreseeable at time of tender. Unpredictability of the timing or the length of any variation that causes time related costs, determines the need to cast the equitable ruler over the nature or circumstances affecting the use of a classic static WDR. The classic static WDR will bend to the winds of actual circumstance.


To avoid confusion, (1) where a % or WDR is not stated a reasonable % or WDR shall be used per 9.3.9, 9.3.10, 9.3.11, (2) where a % or WDR is stated but is inequitable, a reasonable % or WDR shall be used per 9.3.12. It is clear the parties intended Overhead and Profit recovery to be reasonable in all actual variation circumstances because they are unforeseeable at time of tender. Equitability is a two way street. If there are stated % and WDR's that are manifestly too high to be equitable in the circumstances to the Principal, this same argument would be presented to arrive at reasonable %'s or WDR's of lower value. Any argument that stated rates are fixed except for exceptional circumstances, is attempting to create a narrow grey interpretation to which I would counter that the ambiguity attempting to be created is subject to the Contra Proferentem rule.



Multiple WDR's per delay event, account for prevailing circumstances


It may not be equitable to calculate just one WDR per delay event. Longer delay events may transition through anticipated phases of a project. The tower crane may get erected or dismantled during a longer delay. A delay may occur during December and January as well as February and March, resulting in very low number of working days to calculate a WDR with.



The Universal Overhead and Profit Recovery Formula Summary (For Head Contractors & Subcontractors)


This formula method for scheduling a working day rate is always equitable because;

(a) it reflects the actual off-site overhead ratio of the company; and

(b) it produces a variable Working Day rate that scales relative to actual turnover resourced by the company overheads to be recovered at the time a delay event occurred.


For NZS3910:2013 Specific Conditions;

Clause 9.3.10 selection Option (iii) as nominated in Contractor’s Tender.

Clause 9.3.11 selection Option (c) as nominated in Contractor’s Tender.


Nominate within a Contractor’s Tender the following;

“Universal Overhead and Profit Recovery Formula (for time related costs per WD);

(a) On-site OH (P&G) @ 8% or relevant monthly P&G Turnover /Relevant Monthly Working Days; plus

(b) Off-Site OH + Profit (Margin) @10% or $500/WD/$100K Turnover/Month; plus

(c) Relevant Subcontractor On-site OH (P&G) + Off-Site OH + Profit (Margin) using the same principle formula & ratios prevailing at time of tender.


The Risk of being Average with Off-site overhead + Profit recovery


When Covid stopped everything for 4 weeks, every client needed to contribute their share. But average WDR recovery would have been inequitable to many clients. The need for relevant proportionality, specifically where short-term turnover is far from the project average overall, provides an equitable outcome.

 

However, this approach to equity only works well for short delays i.e. say less than a month. The longer the delay relative to the total project duration, the more the average WDR represents equitable recovery.



Related Blog Posts


Offsite Overhead Recovery Mission - April 2021

Time to break out a “Time related overheads” claim, NZS3910 Style. - May 2020



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


By Matthew Ensoll

FNZIQS. Reg.QS.

Editor New Zealand Building Economist.



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