Indirect costs and overheads

Indirect costs divide into two layers. Site (or field) overheads are project-specific: supervision and site staff, offices and welfare facilities, temporary power and roads, general-use cranage, security, quality and safety functions. Head-office overheads are the contractor's cost of existing — management, premises, tendering — recovered as a percentage across all projects. Margin sits on top of both.

Indirects are estimated differently from directs: not from quantities but from the execution plan, and above all from duration. A large share of site overhead is time-related — the site establishment costs roughly the same per month whether the month was productive or not — which is why schedule slippage flows almost directly into indirect cost growth, and why claims for delay are, financially, mostly claims for extended overheads.

The estimating failure is treating indirects as a habitual percentage of directs. The ratio varies enormously with project duration, remoteness, and how much of the temporary infrastructure already exists, and a percentage carried over from a previous project encodes that project's conditions, not this one's.