FIDIC / Legal Reference: Component of Cost under FIDIC Clause 1.1.4.3
The contribution to a contractor’s central office costs — management salaries, rent, IT, finance — attributed to a specific project. In prolongation claims, the head office overhead contribution for the extended period is a recoverable head of cost, calculated by one of several recognised formulae.
What it means in practice
The rationale for recovering head office overheads in prolongation claims is that the contractor’s central office has been supporting the extended project for longer than anticipated. Three formulae are commonly used: the Hudson Formula, the Emden Formula, and the Eichleay Formula. Each produces different results and each is challenged by opposing parties.
UAE arbitration tribunals will accept any formula provided the contractor substantiates it with actual audited accounts showing the overhead recovery rate. Claimed rates not supported by financial records are routinely reduced or disallowed.
Where disputes arise
International contractors with high European head office costs sometimes attempt to apply those rates to UAE projects — which tribunals may challenge if the UAE project was not actually consuming those head office resources.
UAE Context
The most reliable approach in UAE arbitrations is to use the Emden Formula with the actual audited overhead rate from the contractor’s accounts — supported by audited financial statements.
Related terms
Head office overhead calculation and substantiation requires specialist financial and claims expertise. e-Basel provides expert quantum analysis for prolongation claims in UAE construction disputes.
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