OHP construction stands for overhead and profit involves a wide range of costs from material to labour and equipment to permit costs. But these (OHP) two costs are often taken for granted! However, these are some of the most critical components of overall project cost. For fair pricing and profitability, contractors, owners, and stakeholders must understand OHP construction.
SCOOP INTO OUR ARTICLE TO DISCOVER KEY ELEMENTS OF OHP CONSTRUCTION, THE SIGNIFICANCE OF OHP, AND HOW TO CALCULATE OHP CONSTRUCTION!
Key Elements of OHP Construction
OHP means construction overhead cost and profit generated in the project.
Overhead
Overhead is the indirect cost that is associated with the constant running of a construction business. Moreover, it is vital for day-to-day operational costs but is not directly related to any specific project.
- Executive and administrative payroll
- Employee taxes and benefits
- Insurance
- Professional fees such as marketing and accounting
- Occupancy and utility bills
- Telephone and technology
- Vehicle expenses
- Tools and equipment
- Legal and marketing
- Other office expenses.
Profit
Profit is the amount that is left after all overhead cost subtraction. It is a significant component of a project, as it represents the reward for the time, resources, and efforts that you have invested in the project. However, project profit varies from project to project due to its size, complexity, market conditions, and strategy used by the contractor.
Why OHP Construction is crucial?
Fair Pricing
OHP provides a clear understanding to the owner about the cost involved in their project. Additionally, it allows the contractor to achieve profit by covering operational costs, guaranteeing financial sustainability.
Risk Management
Unforeseen delays, market fluctuations, and cost overruns are some risks that are associated with the project. By including profit margin in OHP calculations contractors can avoid these risks.
Quality Assurance
By accounting for OHP in the project budget, contractors can maintain high-quality standards without cutting corners to reduce costs. What are the results? It leads to better outcomes for the proprietor and other project stakeholders.
How to calculate OHP construction?
OHP construction is typically calculated as a percentage of direct cost. This percentage varies as per the type of project, the contractor overhead cost, and the desired profit margin.
To calculate OHP, you can use the following formula:
OHP = (Total Cost x OHP Percentage)/100
The contractor needs to estimate accurately their overhead costs and profit margin to ensure fair return. If you still have any ambiguity then consult a construction cost estimation expert to calculate OHP for your project to ensure the success of the project.
Negotiation and agreement
OHP percentage is negotiable so it can change during the bidding process. To avoid any discrepancy, the agreement should be clear between the project owner and contractor.
How OHP Calculations Benefit Future Plans?
The contractor must use industrial standards to calculate overhead and profit costs. There are some of the reasons that benefit your business in terms of OHP calculations:
Business Management
After knowing the actual OHP cost, the contractor has the confidence to run the project. You will know how much work you have to do, how to price the job, and what core requirements are needed.
Business Growth
By accurate calculations you can allocate money to different resources like marketing, adding new tools, and hiring a worker.
Business Protection
Finally, after proper overhead and profit analysis, you will know where you are spending more and prevent yourself from under-quoting jobs. It also allows your bank balance in the green zone on the safer side.
Common Mistakes In Calculating OHP Construction
Even with the right formulas and techniques, these are some common mistake that usually happens during the calculations.
- Profit margin vs markup
Profit margin and profit markup must not be mixed. A profit markup is a percentage of the project cost to generate a profit margin.
- Fixed and variable cost
Don’t be lazy, you must include all the fixed and variable costs. A small fluctuation can cause a major difference in overall estimation.
- Inconsistent profit tracking
Be consistent in tracking profit a single miss can hurt your business in the long run.
- Overly complicated payments
Avoid overly complicated payments streamlining payroll, invoicing, and expenses can help in this case.
THUS, BY UNDERSTANDING AND MANAGING OHP CONSTRUCTION EFFECTIVELY, CONSTRUCTION COMPANIES CAN IMPROVE THEIR PROJECT PROFITABILITY AND ENSURE LONG-TERM SUCCESS!
Conclusion
OHP construction has a significant role in construction that encompasses the indirect running cost of a business and a profit margin for the contractor. By accurate calculations of OHP, you can ensure fair pricing, risk management, and quality assurance in the project. Additionally, both parties must understand and agree on OHP calculation to ensure the profitable and successful completion of the project.
