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, training, CITB levy, company vehicles and salaries for staff etc 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.
   

OH&P forms part of a wider construction pricing structure that can also include Provisional sums and Preliminaries. Understanding how these elements work together can help clients make more informed comparisons when reviewing quotations and tenders.

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. Additional works may result in additional preliminaries if the project takes longer to complete the programmed as a result of additional works being instructed.

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: Some JCT contracts may state the OH&P as part of the cost structure, so both parties can see 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.
   

For clients comparing quotations, understanding OH&P alongside other cost allowances can provide a clearer picture of how a project has been priced and help avoid focusing solely on the final figure.

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 25%, although this will vary for particularly complex, high-risk projects or smaller projects.

It's important to note that OH&P 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 25%, 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 your 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. Alongside Provisional Sums, Prime Cost Sums and Preliminaries, it forms an important part of understanding how construction costs are structured and presented within quotations and contracts.

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, construction costs or planning a renovation, listed building, new build or extension project etc, don’t hesitate to contact our team at mail@saundersbrothers.co.uk or call 01844 273783. You can also explore our recent projects and related articles below for further guidance on construction budgeting, quotations and the building process.

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