Formulae To Formulate The "Head Office Overheads"

Formulae to Formulate the “Head Office Overheads”
Hon Chi Yi, Ludwig

FHKIS
1. Introduction It was accepted in several court cases, but all of them

occurred many years ago. More recently, the formula has
A losses and/or expenses contract clause commonly exists in been criticized for using the HO OH percentage from the
the frequently-used Conditions of Contract in Hong Kong. contract as the factor to calculate those costs that may
For losses and/or expenses claims, heads of claims generally bear little or no relation to the actual HO OH costs for the
include site overheads, head office overheads (“HO OH”), contractor during the extended/delayed period.
loss of profits, and finance charges. Assessors of HO OH
usually look at the loss of opportunity (“LOO”) approach (the 3. Emden’s Formula
“formula approach”) or the actual cost approach. In this
article, I shall focus only on the LOO approach. In order to try to improve Hudson’s Formula, another formula
emerged from the book, Emden’s Building Contracts and
In the LOO approach, it is assumed that because of the delay, Practice. This was Emden’s Formula:
the contractor’s organization is unable to move on to another
project (i.e., another opportunity) and earn the combined
profit and HO OH, of which it is reasonably capable. The HO OH Percentage2 Contract Sum
________________ X ______________ X Period of Delay
saying goes that “the opportunity to earn elsewhere is lost”. 100 Contract Period
Sir William Stabb, QC,1 said:
It is generally accepted that, on principle, a contractor Unlike Hudson’s Formula, Emden’s Formula has the
who is delayed in completing a contract due to the advantage of extracting the contractor’s actual HO OH
default of his employer, may properly have a claim percentage from the audited account(s) of the contractors
for head office overheads during the period of delay, to assess the HO OH costs. Thus, it has received plenty of
on the basis that the work-force might have had the recent judiciary support.3
opportunity of being employed on another contract
which would have had the effect of funding the I find Emden’s Formula quite useful and have used it in
overheads during the overrun period. several of my assessments of the HO OH of the prolongation
costs, provided that the contractor could prove a loss of HO
2. Hudson’s Formula OH and/or profits due to a delay by the employer.
This formula was published in the book, Hudson’s Building

and Engineering Contracts, as follows:
HO OH Percentage Contract Sum 1. J.F. Finnegan, Ltd. v Sheffield City Council (1988)
in the X _____________ X Period of Delay 2. Emden arrived at this result by dividing the total overhead cost of the
Contract/100 Contract Period contractor’s organization as a whole by the total amount of turnover
in the audited accounts.
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NOVEMBER 2013
4. Eichleay’s Formula project, so as to average out the irregularities and include the
information for the relevant years, as advised by the court.5
Someone may argue that if the LOO cannot be proved, then
both of the above formulae cannot be used. I am of the Hon Reyes J.
opinion that this is quite right. As a result, the third formula
below may be used to assess the HO OH under this scenario, Here I accept Mr. Molloy (Mr. John Molloy)’s reasoning.
which someone claims is likely based on “actual costs” He chose a 4 year average of head office overhead/
instead. turnover percentage to obtain a more balanced
overhead percentage. Mr. Molloy reasoned that, while
Eichleay’s Formula: the contract period was covered by the years 2003 and
2004, the Contractor would have most likely based its
Value of work tender on the 2 years preceding the contract period”
during
Total HO
(bracket added by the author).
contract period
HO OH Allocated to = _________________ X OH during
the Contract (“A”) Total value of work the contract
for the company as period
a whole during the
contract period
Period of Delay
Total HO OH assessed =A X _____________
Contract Period
I recently used this formula to assess the HO OH for the

prolongation costs, as applied by the contractors, and found
it to be very useful. In my opinion, this formula fairly and
reasonably assesses the HO OH, since it compares the value
of the works carried out in the contract for the project,
for which the contractor claimed the prolongation cost, to
the total value of the works carried out by the contractor
as a whole during the above contract period. Usually, the
consultant quantity surveyor can advise on the value of the
works carried out in the contract (from, say, the final account
prepared) to claim a prolongation cost, whilst both the total 3. For instance, Beechwood Development Co. (Scotland), Ltd. v Stuart
value of the works for the company and the total HO OH can Mitchell (2001); Global Bright Engineering, Ltd. v CWF Piling & Civil
Engineering Co., Ltd. (2006).
be found in the contractor’s audited accounts.
4. For instance, if the contract period was from 2009 to 2010, then it
Moreover, the audited accounts of the contractors referred should be better to select audited accounts for the years 2007, 2008,
2009, and 2010 for assessment/averaging.
to should be included at least one year (preferably two years)
before and include the contract period4 for that particular 5. Hsin Chong Construction (Asia), Ltd. v Henble, Ltd. (2006).
54
NOVEMBER 2013

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Formulae to Formulate the “Head Office Overheads”

Hon Chi Yi, Ludwig

1. Introduction It was accepted in several court cases, but all of them

This formula was published in the book, Hudson’s Building

I recently used this formula to assess the HO OH for the

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