OVERHEAD COSTS IN BUILDING CONSTRUCTION IN SAUDI ARABIA Author: Mohammad Al-Shahri (1997) Presented By Fawaz Al-Ghamdi January 1, 2005

OUTLINE Introduction Objective & Limitation Research Methodology Results &Analysis –Awareness of OH cost (Skip) –Company OH Cost (Skip) –Project OH Cost Conclusion Recommendation

INTRODUCTION  What is OH Cost? (literature) –Summary of expenses that benefit more than one cost objectives. –Charges that cannot be attributed to a single product or services –Costs that are not a component of the actual construction work but are incurred by the contractor to support the work.

INTRODUCTION Types of OH Cost? (Literature) I. Company OH costs (G&A OH). Costs which are incurred to operate and manage the construction business II.Project OH costs (Job site OH- gen. Cond.)

INTRODUCTION  Components of Project OH Cost Surety Bonds Project insurance Financing Cost Supervision Cost Costs of Tem. Constr. Cost of Repair Work Equipment costs Miscellaneous costs

OBJECTIVE This research is directed under the following questions: How do contractors see OH costs and their effects on performance? What methods are currently used to identify, estimate, allocate, and control OH costs types?

STUDY LIMITATION This study is limited to large building contractors as classified by the agency of constructors' classification of Ministry of Public Works and Housing (MPWH) in Saudi Arabia

RESEARCH METHODOLOGY (5 steps) 1.Data Required –The literature review (52 ref.) –The survey that seeks the following: –Awareness of the existence OH costs among cont. –Actual procedures related to identifying, estimating, allocating and control of OH costs. –Advantages and disadvantages associated with the methods used. –Areas that have potential for importance.

RESEARCH METHODOLOGY (Cont.) 2.Data Collection By Personal interviews (Questionnaire) –22 Q’s (cont. general info.) –8 Q’s (OH costs in gen.) –8 Q’s (Co. OH costs) –11 Q’s (important issues on projects OH costs)

RESEARCH METHODOLOGY (Cont.) 3.Population and sample The population of the study is all building contractors classified by MPWH in the first three grades for contractors of Saudi Arabia and five for foreign. 4.Interview Sessions The questionnaire was explained to the contractor and then left to be answered later according to the contractors' request. 5.Data Analysis Answers were coded and entered into a statistical analysis software which is a part of an excel program.

RESULTS AND ANALYSIS 3.Project OH Costs  What is Project OH Cost?  Ratio of Project OH to Project Direct Cost  Contractors' Perception  Classification of Project OH Costs  Estimation of Project OH Costs

RESULTS AND ANALYSIS (Cont.)  What is Project OH Cost? All contractors identify the term as those costs specific to a project but not the work item within the project.  Ratio of Project OH to Project Direct Cost  Literature: 5-30 % of project direct costs  Survey: % of project direct costs.

RESULTS AND ANALYSIS (Cont.)  Contractors' Perception Majority: Increased past 5 years Reasons: –Delayed payments and financing costs –Client requirements –Cost inflation –Government regulations –Lack of new projects –Firms growth

RESULTS AND ANALYSIS (Cont.)  Supervision costs  Equipment cost  Temporary cost  Financing cost  Profit  Estimate contingency and un foreseen conditions  Insurance, taxes, and bonds  Cost of rework  Classification of Project OH Costs

RESULTS AND ANALYSIS (Cont.)  Estimation of Project OH Costs  Methods (survey) i.Majority: The contract documents: Ex. manpower- site ii.Project total direct cost (base): 29 % cont. used it  67% of the contractors use particular method to estimate project OH cost because contract document allow them to directly or indirectly quantify project OH costs

RESULTS AND ANALYSIS (Cont.)  Factors affecting project OH costs 1)Project complexity, location, and size 2)Percentage of subcontracted work 3)Payment schedule 4)Need for work 5)Client's strictness in supervision 6)Type of contract 7)Number of competitors 8)Contractors cash availability

RESULTS AND ANALYSIS (Cont.)  Controlling Project OH Cost  Only 23% implemented Project OH Cost Control  HOW?  Accurately estimate project OH costs from documents and check lists in the first place.  Practicing proper activity planning & scheduling.  Proper site management.  Save site offices, camps, and workshops for future projects.  Recruit engineers and supervisors with low wages.  Use client's available resources whenever possible.

CONCLUSION KSA cont. have slightly high OH cost Co. OH cost / Project direct cost = 13 % Co. OH cost / Annual constr. Vol. = 14.3 % Factors effect. on the co. OH costs: Auto and equip., head office, labor related costs and financing costs. Causes for increasing co. OH costs: delayed on payment, lack of new projects, cost inflation and government rules. Factors effect. on the amount co. OH allocated to a project: types of contract, cont.s' need for work, no. of competitors Project OH costs are within acceptable range. Project OH costs are going up due to late payment, client necessity and cost inflation.

RECOMMENDATION Recommendation for Project OH costs –Contractors & project owners should solve the problem of delayed payments in order to reduce financing costs. –Contractors should apply cost control measures on supervision cost, equipment costs, temporary constructions, and financing costs. –Project owners should minimize OH related requirements in their contract documents so that the project OH cost can be minimized.

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