Hudson Formula and Extension of Time Claims
The payment of additional monies in respect of Head Office overheads and profit is the subject of much debate and discussion. Views range from a categorical denial that such items can ever comprise direct loss or expense to the blanket application without recourse to the facts of a formula for calculating recovery.
Head office, Central Stores, Fabrication facilities and the like are offsite costs. Duncan Wallace the author of Hudson's Building and Engineering Contracts tenth edition states on page 598, that "offsite overheads are usually known in the (construction) industry as ‘Head Office Overheads". This cost is usually allowed for in the tender by means of a percentage on the value of the Contract.
"As regards head-office overheads, these essentially represent, firstly, generally administrative costs incurred by the organisation in setting up and running the contract, which are increased if there is any delay or disruption; and secondly, loss of profit the organisation could have made in the relevant period, had they been free to take on other jobs. Inevitably, they are virtually impossible to calculate precisely, since the time spent by each individual on each contract is not recorded separately."
Accordingly, when it is necessary to claim head office overheads for a period of delay a calculation is adopted as follows:
Dividing the total overhead cost and profit of the organisation as a whole by the total turnover of the organisation normally arrives at the head office percentage. The formula set out above thus notionally ascribes an amount in respect of overheads and profit proportional to the relation which the value to the total turnover of the organisation. This formula is now known as Hudson's formula and is generally accepted as a recognised method for calculating the additional cost payable for head office and other off site overheads.
Loss on Overhead recovery might be difficult to calculate with precision on any one Contract; it is nevertheless real. The Hudson Formula does certainly provide a simple solution to calculate such a loss in relation to an extension of the project duration. Our extension of time template recognises this entitlement and sets out the recovery in a logical and correct manner when making such claims - Refer to our Contractual Management Package.