Understanding OH&P in Construction

Managing costs and profit is crucial in any business and all will have added an allowance for OH&P when calculating their selling prices, though you won’t have seen it when shopping in the supermarket. It’s visible to clients in construction prices because estimating is done project by project and prices are widely discussed between builder and client at the tendering stage.

What Does OH&P Stand For?

OH&P stands for Overheads and Profit and it refers to the allowance that contractors add to the direct costs of a project to cover their business expenses and the profit they plan to make on the project.

Let’s break this down further:

1. Overheads (O): These are the indirect costs that contractors incur to run their businesses. They aren’t directly tied to any one project but are general items necessary for day-to-day operations. Overheads can include things like office rent, administrative costs, utilities, insurance, and salaries for staff not directly working on the construction site. Essentially, these are the costs of doing business that must be covered by every project the contractor works on.

2. Profit (P): This is the amount of money the contractor plans to make from the project after covering both direct and overhead costs. Profit is typically calculated as a percentage of the total project cost.
   

How is OH&P Calculated?

OH&P is typically calculated and expressed as a percentage of the total direct costs of the project. This is important because when variations to the works are ordered, the contractor is normally contractually bound to charge the same OH&P on them as on the original contract. For example, if the direct costs of a construction project (materials, labour, etc.) are £100,000, the contractor might apply an OH&P rate of 15%. This means the contractor would add £15,000 (15% of £100,000) to the total cost of the project to cover their overheads and profit.

If, after the contract was signed, the Client then asked for an additional feature for which the direct costs were calculated at £20,000, the contractor would charge it at £20,000 + 15%, i.e. £23,000. Even if this seemed a bargain price, the contractor could not charge more because he had signed the contract with a declared OH&P percentage of 15%.

For a more accurate understanding, here’s a breakdown:

• Direct costs: These include all costs directly related to construction, such as labour, materials, equipment, site utilities, subcontracts and preliminaries.

• OH&P mark-up: The percentage added to the direct costs to cover the contractor's business expenses and profit.
  

So, if direct costs are £100,000 and the OH&P rate is 15%, the total project cost would be £115,000 and if a variation with direct cost of £20,000 had been added, the total cost would be £138,000.

Why OH&P is Important

Understanding OH&P is crucial for both contractors and clients. Here’s why:

1. Budgeting: For clients, understanding OH&P may allow you to better estimate the total cost of your project. Having the OH&P clearly stated helps you to be certain you are budgeting for all costs, including overheads and profit margins, not just the direct costs of construction.

2. Transparency: For contractors, explaining OH&P clearly to clients can improve transparency. If a client understands how costs are broken down, it can help build trust and prevent any misunderstandings about the pricing. Also, as stated above, you can be sure that if you order any variations (and you will), they won’t be charged at an inflated rate.

3. Contractual Clarity: Almost all construction contracts will explicitly list OH&P as part of the cost structure, so both parties know exactly how the contract charges are built up. It’s important to ensure that the OH&P percentage is clearly stated in the contract to avoid disputes.
   

Typical OH&P Rates in Construction

OH&P rates can vary depending on the type and size of the project, as well as the specific contractor or company. Typically, the OH&P rate in construction can range anywhere from 10% to 20%, although it may be higher for particularly complex or high-risk projects. Smaller, less complex jobs may have a lower OH&P percentage, while larger or more specialised projects may carry a higher rate.

It's important to note that OH&P is might be negotiable in some cases, especially for larger projects where there is room for discussion on margins. It may be that if the market is slack, the builder might prefer work at a reduced profit margin to no work at all. When the market is buoyant however, you may find that the OH&P percentage is much less negotiable.

Key Takeaways

1. OH&P stands for Overheads and Profit, and it’s a standard term used in construction contracts to cover indirect costs and contractor profit margins.

2. It is calculated as a percentage of the direct project costs and is added to the overall price.

3. OH&P is important for transparency and budgeting for both contractors and clients. Understanding this term ensures that both parties are on the same page about the financial aspects of a project.

4. Typical OH&P rates normally range from 10% to 20%, though this can vary depending on the complexity of the project and the contractor’s business model.
   

Conclusion

Now that you have a clearer understanding of OH&P in construction, you can navigate construction contracts and project estimates with greater confidence. Whether you're a contractor looking to explain your pricing or a client aiming to understand the true cost of your project, the OH&P percentage plays an essential role in setting expectations and ensuring a successful outcome.

At Saunders Brothers, we are committed to offering clear, fair, and transparent pricing on all our projects, ensuring that you fully understand the costs involved in your building work. If you have any questions about OH&P or need advice on your upcoming project, don’t hesitate to contact our team at mail@saundersbrothers.co.uk or call 01844 273783.