PROJECT OVERHEAD COST

Project overhead costs, also known as indirect costs, are expenses incurred in support of a
project but not directly related to the production of a specific product or service. These costs
are essential for the successful execution of a project but are not allocated to individual units of
output. This report provides an overview of project overhead costs in the Philippines,
considering factors such as industry, project size, and regulatory requirements.

Types of Project Overhead Costs

 General and Administrative (G&A) Costs: These include expenses related to running
the overall business, such as salaries of administrative staff, office rent, utilities, and
insurance.

 Selling and Marketing Costs: Expenses incurred in promoting and selling products or
services, including advertising, sales commissions, and public relations.

 Engineering and Design Costs: Costs associated with the planning, design, and
engineering of a project, such as salaries of engineers and architects.

 Project Management Costs: Expenses related to managing the project, including

salaries of project managers, project coordinators, and support staff.

 Travel and Entertainment Costs: Expenses for travel, meals, and entertainment related
to project activities.

 Legal and Professional Fees: Costs associated with legal services, consulting fees,
and other professional services.

 Insurance Costs: Insurance premiums for general liability, property damage, and
workers' compensation.

 Interest Costs: Interest paid on loans or other financing used for the project.

 Taxes: Taxes levied on the project, such as business taxes and value-added tax (VAT).

Factors Affecting Project Overhead Costs

 Project Size and Complexity: Larger and more complex projects generally have higher
overhead costs due to increased management, coordination, and resource requirements.

 Industry: Overhead costs can vary significantly across different industries, depending on
specific industry standards, regulations, and market conditions.

 Geographic Location: Location can impact overhead costs due to differences in labor
costs, rent, and other expenses

 Economic Conditions: Economic factors such as inflation, interest rates, and currency
fluctuations can affect overhead costs.

Overhead Cost Allocation Methods

There are several methods for allocating overhead costs to projects:

 Direct Labor Hour Method: Allocates overhead costs based on the number of labor
hours worked on the project.

 Direct Labor Cost Method: Allocates overhead costs based on the total direct labor cost
incurred on the project.

 Machine Hour Method: Allocates overhead costs based on the number of machine hours
used on the project

 Direct Materials Cost Method: Allocates overhead costs based on the total direct
materials cost incurred on the project.

Citations:

 Philippine Institute of Certified Public Accountants (PICPA): https://picpa.com.ph/

 Department of Trade and Industry (DTI): https://www.dti.gov.ph/
 Philippine Chamber of Commerce and Industry (PCCI):
https://www.philippinechamber.com/
 Industry-specific publications and associations

PROFIT/ MARK-UP

Profit and mark-up are essential components of the construction industry, as the contribute to
the financial viability of projects and business. This report explores the concept of profit and
mark-up in the Philippine construction industry, considering factors such as industry standards,
market conditions, and project complexity.
Understanding Profit and Markup

 Profit: The financial gain realized from a construction project after deducting all costs,
including direct costs (materials, labor) and indirect costs (overhead).
 Markup: The percentage added to the cost of a product or service to determine the
selling price. In construction, markup is often used to cover overhead costs and
generate a profit.

Factors Affecting Profit and Markup

 Project Size and Complexity: Larger and more complex projects typically require
higher overhead costs and may have greater risks, leading to higher markup
percentages.
 Market Conditions: The competitive landscape, demand for construction services,
and economic conditions can influence profit margins.
 Project Location: Location can affect costs and market demand, impacting profit and
markup.
 Risk Factors: Projects with higher risk factors, such as challenging site conditions or
regulatory hurdles, may require higher markups to compensate for potential losses.
 Industry Standards: Industry standards and best practices can provide guidance on
appropriate profit margins and markup percentages.

Common Markup Percentages in the Philippine Construction Industry

While markup percentages can vary depending on the factors mentioned above, here are some
general estimates:
 General Contractors: 10-20%
 Subcontractors: 15-25%
 Specialty Contractors: 20-30%
Note: These are rough estimates, and actual markups may vary significantly based on specific
project circumstances.

Strategies for Maximizing Profitability

 Efficient Project Management: Effective project management can help minimize

costs and maximize efficiency, leading to higher profit margins.
 Value Engineering: Identifying cost-saving measures without compromising quality
can improve profitability.
 Risk Management: Implementing risk management strategies can help mitigate
potential losses and protect profit margins.
 Negotiation Skills: Strong negotiation skills can help secure favorable terms with
suppliers, subcontractors, and clients.
 Diversification: Diversifying project types and clients can help reduce risk and
stabilize profitability.

Profit and markup are essential considerations for construction businesses in the Philippines.
By understanding the factors that influence these metrics and implementing effective
strategies, businesses can improve their financial performance and ensure long-term
sustainability.

Citations:

 Philippine Contractors Association (PCA):https://www.philippineconstructors.org/

 Philippine Institute of Civil Engineers (PICE): https://www.pice.org.ph/
 Construction Industry Authority of the Philippines (CIAP): http://construction.gov.ph/
 Industry-specific publications and consulting firms
 COST PLANNING

This report provides an overview of cost planning practices in the Philippine construction
industry, considering factors such as estimating techniques, cost control measures, and
challenges faced by project managers

Cost Planning Techniques

 Top-Down Estimating: This method involves breaking down the project into major
components and estimating costs based on historical data or industry benchmarks.
 Bottom-Up Estimating: This method involves detailed cost estimation for each
individual work item, providing a more accurate but time-consuming approach.
 Hybrid Estimating: A combination of top-down and bottom-up estimating, combining
the advantages of both methods.
 Parametric Estimating: This technique uses historical data and statistical analysis to
estimate costs based on project characteristics such as size, complexity, and location.

Cost Control Measures

 Budgeting: Developing a detailed project budget that outlines expected costs for
materials, labor, equipment, and other expenses.
 Cost Tracking: Monitoring and tracking actual costs against the project budget to
identify variances and take corrective action.
 Change Management: Establishing a process for managing changes to the project
scope, budget, and schedule.
 Value Engineering: Identifying opportunities to reduce costs without compromising
quality or performance.
 Risk Management: Identifying and assessing potential risks to the project and
developing strategies to mitigate their impact on costs.

Challenges in Cost Planning

 Uncertainty: Construction projects are subject to various uncertainties, such as

changes in material prices, labor shortages, and unexpected site conditions.
 Complexity: Large and complex projects can be difficult to estimate accurately due to
the numerous factors involved.
 Limited Data: In developing countries like the Philippines, historical data and industry
benchmarks may be limited, making accurate cost estimation challenging.
 Regulatory Changes: Changes in government regulations, permits, and fees can
impact project costs.

Best Practices for Cost Planning

 Involve Stakeholders Early: Engage stakeholders from the beginning of the project to
ensure their input and buy-in.
 Use Reliable Data: Utilize accurate and up-to-date data for cost estimation.
 Regular Monitoring and Review: Continuously monitor and review project costs to
identify potential issues and take corrective action.
 Leverage Technology: Utilize project management software and tools to improve cost
tracking and analysis.
Effective cost planning is essential for the success of construction projects in the Philippines.
By utilizing appropriate techniques, implementing cost control measures, and addressing
challenges, project managers can ensure that projects are completed within budget and meet
the desired quality standards.

Citations:

 Philippine Contractors Association (PCA):https://www.philippineconstructors.org/

 Philippine Institute of Civil Engineers (PICE): https://www.pice.org.ph/
 Construction Industry Authority of the Philippines (CIAP): http://construction.gov.ph/
 Industry-specific publications and consulting firms