What Is Overhead In A Pro Forma?
In a typical homebuilder pro forma, the actual costs of a project are estimated, including the hard construction costs and all soft costs. For the most part, these hard and soft costs are directly attributable to the development of the project. One cost category – overhead – is really an allocation of the divisional or corporate management costs attributable to the entire division or company.
A homebuilder divisional office may have 30 – 50 people who are responsible for managing and executing everything that goes on out in the field. This staff would include the division president, vice presidents, managers, and administrative staff. The budget for this divisional office would include the salaries, employee benefits, office rent, equipment, utilities, and any other expense related to this office operation.
A homebuilding project needs to cover all of its costs and hopefully generate a project profit that is a sufficient reward for the risk associated with the investment capital. And while you have all of the field costs to be covered, the divisional overhead needs to be covered as well. But as these office costs are not easily identifiable to each project, an allocation to each project is usually presented in the pro forma.
The allocation of division overhead tends to be somewhere between 3 – 4% of gross revenue. As an example, let’s assume that a division is building and selling 500 homes annually, with an average price of $600,000 per home. With the annual division revenue being $300 million, total office costs of $9 million would equate to a 3.0% allocation in the pro forma. If office costs were $12 million, then the allocation would be 4.0%. In theory, all of the division’s projects will cover the cost of these division overhead costs.
Please share with us below any of your comments and questions.