[— for reference’s sake the “OPPH method” or Overhead Profit Per Hour Method is J. R. Huston’s term for what David Gerstel and I call Capacity Based Markup or Activity Based Markup. G&A means General and Administrative Expenses —]
—“The OPPH method allocates the G&A overhead costs for both jobs based on time. In our case, it’s based on billable field man-hours. We should note that we could have allocated G&A overhead costs based on the crew hour, day, week or month. We could even allocate G&A overhead costs on a man-minute basis but, even for me, this is a bit anal.
My assertion is that the primary reason why the OPPH method more accurately allocates G&A overhead costs is that it ties these costs to a time unit. Since 85 to 95 percent of all G&A overhead costs are paid based on a time unit (per week, month, quarter, etc.), they’re best allocated to jobs based on a similar type of measuring unit.
***** Main point: Since 85 to 95 percent of all G&A overhead costs are paid based on a time unit (per week, month, quarter, etc.), they’re best allocated to jobs based on a similar type of measuring unit. *****
Material, equipment and subcontractor costs (I call these events) can vary dramatically from month to month and from job to job. Hitching G&A overhead costs to these direct costs, which vary so dramatically, makes no mathematical sense. Tying G&A overhead costs to gross sales makes even less mathematical sense.”—
For an example case of this in action read my blog article Comparing Markup Methodologies In Real Some World Pricing Scenarios.
