By Malcolm Abernethy
Executive officer
New Zealand Contractors' Federation
How to value variations is one of the most frequent enquiries I receive by contractors, especially when related to on-site overheads, off-site overheads and profit percentages, and the working day rate. It is important that contractors know how to determine these and apply them to the value of the variation.
Section nine of NZS 3910:2003 Standard Conditions of Contract, details how a variation is valued.
The percentages and working day rate are closely linked to the preliminary and general section of the schedule of prices within a contract and are comprised of time related and fixed costs.
Typical time related costs, making up 80 to 85 percent of the preliminary and general costs, include:
- Site offices;
- Site supervision;
- Consumables;
- Utilities – power, water, sewerage disposal;
- Traffic control;
- Site transport;
- Survey;
- Insurance;
- Bond.
Fixed costs, making up 15 to 20 percent of preliminary and general costs, may include:
- Establishment of offices on site;
- Transport of plant onto site;
- Transport of plant from the site;
- Temporary works;
- Site clearance.
On-site overhead percentage
On-site overheads are costs to the contractor that cannot be directly charged to specific items in the schedule of prices or included in the rates applied to the items.
Costs that may contribute to the on-site overhead percentage include:
- Contractors’ site offices. Cleaning, maintenance, heating, furnishing, general equipment, consumables, telecommunications, photographs, small plant and tools;
- Site supervision and staff, including foremen, clerical, security, etc;
- Temporary works;
- Employees training, welfare, first aid, security and lighting;
- Insurances, legal advice, bonds;
- Survey staff and equipment;
- Power, water and sewerage;
- Access roads, refueling areas, material handling and storage areas and fencing;
- Site clearance and reinstatement at the completion of the project;
- Maintenance of the contract works and during the defect liability period;
- Traffic control;
- Transport of materials and personnel to the site;
- Other site requirements imposed by the conditions of contract and not separately listed in the schedule of prices;
- Specific items required by the project that may include a site office for the engineer’s representative, testing and survey equipment etc.
Off-site overheads and profit percentage
Off-site overheads are the company overheads that may consist of:
- Finance charges;
- Head office costs;
- Directors fees;
- Promotion and advertising costs;
- Legal costs;
- Tendering costs;
- Profit desired.
Both on-site and off-site overheads, and profit percentages can be determined by using the costs of the items described, divided by the value of the contract, multiplied by 100. Contractors need to determine these percentages at the time of tender.
Working day rate
The working day rate is the cost of maintaining the site on a daily basis and can be determined by dividing the amount of the preliminary and general section of the schedule of prices by the duration of the contract. There are other ways of determining a working day rate based on the standby rates for plant on site and direct cost incurred by the contractor for that site.
These values are applied to variations as detailed in Section nine of NZS 3910:2003 Standard Conditions of Contract and in the examples provided at the back of the standard.
The base value of the variation is determined either from first principals or by using the rates from the Schedule of Prices, if the work is similar to that included in the contract.
The on-site percentage is applied to the base value, followed by applying the off-site overheads and profit percentage to the base value, plus the on-site overhead.
With almost every variation there is a corresponding extension of time given. The working day rate is multiplied by the number of days extension of time granted and the sum of the on-site and off-site overheads and profit values subtracted. If the difference is positive it is added to the variation, if the difference is negative no change to the value is made.
Contractor Vol.32 No.10 November 2008
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