OHP (Overheads and Profit) in construction represents the additional percentage that is added to the direct expenses of the project. It stands for overhead and profit or overhead projector. The main purpose is to cover the contractor’s indirect expenses and guarantee profits. However, understanding these factors (Overheads and Profit) ensures the distribution of crystal clear and fair project expenses.
Usually, the following formulas are used to calculate OHP:
Overhead = (fixed monthly expenses) + (indirect costs)
Profit = (project cost) – (overhead + direct costs)
GET TO KNOW INSIGHTS ABOUT WHAT IS OHP IN CONSTRUCTION AND CALCULATE THE FAIR COSTS FOR YOUR BUSINESS’S DIRECT AND INDIRECT EXPENSES!
Why are profit margins super important for your construction business?
A profit margin for any type of developmental project is important because it shows the company’s wealth. It is a simple formula that the higher the profit margin is, the better position of the company will be!
So, make sure to calculate all the costs of the project to ensure that your business is making enough money to survive in the competitive industry. Commonly, the average profit margin in the construction industry starts from almost 7%. But, you make sure to keep your profit margins more than that to cover all your expenses. The main reason is that you have to pay rent for the space you are utilizing, employee salaries, etc. However, most of the successful construction companies keep a 20-43% profit margin in every project.
Is there any challenge to face during the profitability analysis? Yes, changes in the project scope or inflation can affect the profits. You have to be smart enough to deal with all types of challenges in construction projects. In short, you must know how to control profit margins in every type of situation. Aim higher, but only to the extent that it doesn’t result in unfairness to your client and all your expenses are adequately covered.
How to calculate construction profit margins?
- First, you need to know how much cost is evaluated for the whole construction project. If you find any difficulty in doing that, try professional construction cost estimation processes.
- The second step is to cover all the overhead, material, and labour expenses.
- In the next step, divide the estimated figure by the total project estimate.
- Now subtract the overhead, material, and labour costs.
- In this step, multiply the end result by 100 to get the answer in “%” and get the profit margins.
Example of calculating construction profit margin!
Total project estimate: $10,000
Material and labor costs: $7,000
Overhead: $2,000
Total expenses: $7,000 + $2,000 = $9,000
$10,000 / ($10,000 – $9,000) = 10% profit margin
Overhead in Construction Explained
In simple words, overhead is all the Ongoing expenses of your business. It includes both direct and indirect costs used in your business work. Now, you will be confused with direct overhead costs. It is all about the direct expenses, for example, equipment rental, project-specific salaries, and temporary utilities.
On the other hand, indirect overhead costs include office expenses, advertising, and employee salaries. In case, if you forget them while calculating the profit margins. You will end up facing failure and loss in your business!
let’s discuss three types of overheads:
- Operations: This includes routine expenses such as office rent, employee wages, utilities, building materials, insurance, etc.
- Labor: It covers a large portion of your expenses because these are the professionals dealing with construction work. You have to pay their salaries, benefits, and more.
- Equipment: It is impossible that you do not need equipment in construction work. So, count the expenses of tools and equipment required for the projects.
How to calculate overhead in construction?
- First, you need to know The exact value of overhead expenses related to your business. These expenses can be about office space, administrative costs, insurance, vehicles, etc.
- Now calculate direct costs according to your projects. If you are stuck in the preconstruction phase, then you must seek help from professional preliminary estimators. They will help you figure out all the expenses related to material and labour.
- To calculate the overhead rate, divide your overhead costs by your direct expenses.
- Once you are aware of the overhand rate, you can easily estimate the overall project cost.
Example of calculating construction overhead costs
Suppose your business needs every year administrative expenses = $60,000
Direct expenses of your business each year including all materials and labour expenses = $300,000
Total expenses = $360,000.
$60,000 / $300,000 = 20%.
So, Your overhead rate is 20%.
So this means that you can use a 25% overhead rate for the future project.
IMPLEMENT OUR GUIDELINES IN YOUR NEXT PROJECTS TO PREVENT UNDER OR OVERESTIMATION OF YOUR BUSINESS EXPENSES, WHETHER IT IS ABOUT LABOUR OR MATERIALS!
Final words
Hopefully, you have understood what is OHP in construction and how you can calculate it. We have discussed all the major points with examples so that you can understand them easily. Now you can find your answers with the help of our guide for your next project if your project is complex. Seeking professional help can save you time and a lot of effort.