IMPACT OF OVERHEAD COST IN

CONSTRUCTION INDUSTRY

M.Sarath kumar[1]

Student M.E-(CE&M) Civil Engineering Department,

Erode Builder Educational Trust’s Group of Institution

Kangayam, Tamil Nadu, India[1]

sarathudhai@gmail.com

S.Satheesh kumar[2]

Assistant Professor, Department of Civil Engineering

Erode Builder Educational Trust’s Group of Institution

Kangayam, Tamil Nadu, India [2]

ssk.civil@ebet.edu.in

Abstract- In construction industry the cost is classified

into two major categories they are direct cost and

indirect cost. Direct cost that is directly assignable to a

specific product or process. Indirect costs are not

directly attributable to a cost object. Indirect cost of

projects plays the vital role and influence on the

performance of the construction industry. Overhead

costs are extremely important in the cost estimation,

neglecting the overhead cost will affect the contractors

profit percentage. Overhead cost such as executive staff

salary, power consumption charges, temporary sheds,

miscellaneous cost etc. The purpose of this project is to

analyze the overhead cost management in the

construction industry at various zones and determine

the major factors that affects the overheads in

construction projects. Finally the effective cost control

techniques is going to implement in construction site to

control the over runoff the overhead cost.

Key Words – Overhead cost, indirect cost

1. Introduction

Costs that are not directly accountable to a

cost object (such as a particular project, function or

product) are known as overhead cost. Overhead costs

may be either fixed or variable. Overhead costs

include administration, personnel and security costs.

Some indirect costs may be overhead. But some

overhead costs can be directly attributed to a project

and are direct costs.

There are two types of overhead costs one are

the fixed overhead costs which contains activities in a

particular project or company like transportation of

labour to the working site, building temporary roads,

etc. The other are recurring overhead costs which

contains activities that are repeated in a company like

maintenance of records or payment of salaries.

In construction organizations that there are

two types of overhead costs they are:

Project overhead cost

Company overhead cost

1.1. Allocation of overhead cost

Temporary buildings at site

Supervision and project management

Temporary utilities

Temporary job construction(sheds)

Job transportation

Office expenses

Insurance

Employee move costs

Bonds

Equipment contingency

Summer/Winter protection

Escalation

Surveying

1.2. Factors that affect overhead costs

Due to the following factors the overhead

cost are getting increased in the construction

firms

Lack of new project (If there are not

enough new projects)

Cost inflation

Environmental condition

Stakeholder’s profit

Assigning work to sub-contractor

Administrative overhead expense

Delayed payments

Government regulation

Increased marketing cost

Client related reasons

Firm’s growth (Recruiting more

manpower, expanding head office,

buying more equipment, or negotiating

a loan)

2. Objective

The main objective of the proposed work is

To carry out the study about the

overhead cost and to examine the role

of the overhead cost in construction

industry.

To study the factors enrolled in

allocation of overhead cost in

construction organization.

To determine the major factors that

involves in the overhead cost.

To analyze the estimation methods

followed by firm, the effective cost

control techniques is going to

implement in construction site to

control the over runoff the overhead

cost.

3. Research methodology

3.1 Questionnaire design

The research procedure contains two phases.

The first phase included a literature research. The

literature research was conducted through national

journal and international journal. In this study, factors

which affecting the overhead cost in construction has

been obtained from various literature. Questionnaire

were designed on structural basis to get information

about the important data that focusing mainly in their

firms during the allocation of overhead cost in

construction.

A questionnaire was designed to study

about the factors that influence the allocation of

overhead cost in the construction projects. The

questionnaire were prepared with the reference of

literature reviews and expert person in construction.

Expert person knows the real difficulty in controlling

the overhead cost.

Questionnaire mainly divided into two

sections. The first part contains the major factors that

involves in allocating the overhead cost and the

second part contains yes or no questions. The

questions is about the methods and techniques used

to control the overhead cost in the construction

organisations. Questionnaires were made in simple

English which can be understood by the entire

respondent. This survey was to identify the important

data which should consider before allocating the

overhead cost in construction industry.

3.2. Data collection

In this research, methods of data collection

include questionnaire with personal interview and

sent through mail

3.3. Data analysis

3.3.1 Relative importance index

The data collected were analyzed using the

relative importance index (RII) method to rank the

factor which involves during the allocation of the

overhead cost in high grade firms, low and medium

grade firms. The RII for each factor was computed

from the analysis of the rating indicated by the

respondents with the use of five-point likert scale.

The value of 5,4,3,2 and 1 were respectively to very

important, important, somewhat important, less

important, not important. Pareto analysis was used to

determine the most important factors focusing in high

grade firms and medium grade firms. Based on the

result obtained from the relative importance index

method then prioritize the factor which are having

higher percentage in high grade firms and medium

grade firms in construction industry.

The following formula is used to calculate the

relative importance index.

RII=∑Xi Yi / Zi×5

Where,

RII = Relative Importance Index

Xi = number of responses to the factor

Yi = the value of rating

Zi = total number of responses to the

factor.

4. Results and analysis

This chapter describes the results obtained

from the survey responses using Excel sheet. This

chapter also includes number of responses, type of

project executing and value of the project. It also

includes the ranking of factors which involves during

the allocation of the overhead cost in high grade

firms, medium and low grade firms.

4.1. Population characteristics

4.1.1. Number of responses

Totally of Ten (10) questionnaires were sent

to the high grade construction industry and about 7

filled questionnaires were received and fifty six (56)

questionnaires were sent to medium grade

construction industry and out of 56 questionnaires 23

filled questionnaires were received. Figure 1 shows

the number of questionnaire given and the number of

responses received.

Figure 1. Number of responses

4.1.2 Type of projects

Types of projects that carried out in the

construction firms are shown in Figure 5.2 by using it

is easy to determine about the various types of

projects carried out by the reputed companies.

Figure 2. Types of projects carried out in construction

firms

4.1.3. Factors enrolled during allocation of

overhead cost

The collected data were analyzed and ranked

using the relative importance index (RII) method.

Factor which involves during the allocation of the

overhead cost in the construction industry in are

shown in table 5.1. The top 10 factors are shown in

the table 5.2

0

10

20

30

40

50

60

To

tal

nu

mb

er o

f R

esp

on

den

ts

Number of responses

A High

grade

Distributed

B High

grade

Received

C Medium

grade

Distributed

D Medium

grade

Received

A B C D

Response of

Organisation

0

2

4

6

8

10

12

14

16

18

Nu

mb

er o

f o

rga

na

sati

on

Types of projects

Types of projects carried out in

construction firms

A Apartment

building

B villas

C commercial

building

D Hotel building

E Road work

A B C D E

Table 1. RII value of factors enrolled in allocation of

overhead cost

SL.NO. FACTORS RII

VALUE

1 Government regulation 0.93

2 Lack of new project ( If there

are not enough new projects)

0.88

3 Quality level of project 0.87

4 Tendering method 0.87

5 Project duration 0.87

6 Administrative overhead

expense

0.86

7 Project location 0.83

8 Wrong management decision 0.83

9 Firm’s growth 0.83

10 Delayed payments 0.83

11 Stakeholders profit 0.82

12 Total contract value 0.81

13 Assigning work to sub-

contractor

0.81

14 Environmental condition 0.80

15 Special site preparation 0.80

16 Project complexity 0.79

17 Cost inflation 0.79

18 Financial and insurance

charges

0.79

19 Type of contract 0.79

20 Experience of performing

similar project

0.79

21 Client related reasons 0.79

22 Project size 0.78

23 Increased marketing cost 0.76

24 Site layout 0.75

25 Payment schedule 0.75

Table 2. Top 10 factors

FACTORS RII RANK

Government regulation 0.93 1

Lack of new project ( If

there are not enough new

projects)

0.88 2

Quality level of project 0.87 3

Tendering method 0.87 4

Project duration 0.87 4

Administrative overhead

expense

0.86 6

Project location 0.83 7

Wrong management

decision

0.83 7

Firm’s growth 0.83 7

Delayed payments 0.83 10

Figure 3. Top 10 factors

5. Conclusion

Through the literature review, major factors

enrolled during the allocation of overhead cost in

construction organization were determined. Based on

the factors obtained from the literatures,

questionnaire were framed. Questionnaire survey has

been carried out on 30 different companies with

project managers and site engineers. The analysis of

the collected data were done by RII method (Relative

Importance Index). Through the analysis, the top ten

factors which influence the overhead cost were

determined.

0.780.8

0.820.840.860.88

0.90.920.94

RII

VA

LU

E

FACTORS

TOP 10 FACTORS

RII VALUE

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