Indirect Costs and Overhead Charges

Think this way. Imagine an Employer who calls upon a tender, for a special type of writing Pen, with all
risks assumed by the Employer and excluding any special requirement. The Employer sights and accepts
a Tender submitted by a Contractor. The Contractor appoints three Subcontractors, those are for
simplicity in understanding, Head office overhead, Site office overhead and Supplier (appointed by the
Head office). The Supplier delivers the Pen, the Site checks the quality and the Head office settles the
Supplier’s payment. In this case, the Contractor issues three cheques in the favour of the Head office, Site
office and Supplier. The Contract Price matches with the sum of all the issued cheques and 10 per cent
profit on every cheque. The Employers eventually settles such Contract Price with the Contractor. Happy
days!
In this case:
1. Direct cost for the Contractor = Supplier’s cheque amount.
2. Indirect cost for the Contractor = Sum of Head office overhead and Site office overhead cheque
amount.
3. Lastly, remains the profit.
Let us modify the case a bit. Imagine the Employer’s risk assessment consultant advises to add Insurance
policy for the Works. Meanwhile, the Employer appoints a specialist tailor (as a Nominated
Subcontractor under Provisional Sums) to deliver a Jacket to compliment the Pen (as observed, after
buying a TV people buy a sofa set to compliment the TV. Anyways). The Employer sights and accepts a
Tender submitted by a Contractor. The Contractor appoints five Subcontractors, those are, Head office
overhead, Site office overhead, Supplier (appointed by the Head office), the Nominated Subcontractor
(the tailor) and Insurance company.
The Insurance company delivers the Insurance policy, the Site checks the quality and the Head office
settles the Insurance company’s payment.
The Supplier delivers the Pen, the Site checks the quality and the Head office settles the Supplier’s
payment.
The Nominated Subcontractor delivers the Jacket, the Site checks the quality and the Head office settles
the Nominated Subcontractor’s payment.
In this new case, the Contractor issues seven cheques, those are, in the favour of the Insurance company
(first cheque), Head office (two cheques, one for Supplier related work and another for Nominated
Subcontractor related work), Site office (two cheques, one for Supplier related work and another for
Nominated Subcontractor related work), Supplier (Sixth cheque) and Nominated Subcontractor (Seventh
cheque).
The Contract Price matches with the sum of all the issued cheques and 10 per cent profit on every
cheque. The Employers eventually settles such Contract Price with the Contractor.
In this new case:
1. Direct cost for the Contractor = Sum of Supplier’s and Nominated Subcontractor’s cheque
amount.
2. Indirect cost for the Contractor = Sum of
a. Insurance company’s cheque amount [This covered the Employer’s Risk].
b. Sum of Head office overhead and Site office overhead cheque amount for the Pen [This
covered the measured work].
c. Sum of Head office overhead and Site office overhead cheque amount for the Jacket
[This covered the special requirement/provisional sums – the Jacket].
3. Lastly remains the profit.
The cases above are to demonstrate the difference between indirect costs and overhead charges. With
every other case categories of indirect cost vary. Nevertheless, Contract Price comprises of direct costs
(including overhead charges), indirect costs and profit.