The operator is not entitled to a tentative recovery of overhead cost based on authorized expenditures at the time the AFE is approved by the parties or at the time “first construction charges” are recorded, but should assess Major Construction Overhead on a monthly basis as the expenditure thresholds are attained. The operator, however, may elect to use advance payment requests, including overhead based on the amount of the cash advance, for the purpose of obtaining funds on a more timely basis.
All COPAS Model Form Accounting Procedures to date, except the 1962 form, state that “Operator shall either negotiate a rate prior to the beginning of construction, or shall charge the Joint Account as follows.” For projects involving a different amount of overhead costs than provided by the agreement, or if a permanent change takes place in the operator’s overhead costs, it is the responsibility of both parties to negotiate higher or lower rates.
In negotiating Major Construction rates, special consideration should be given regarding whether construction projects, including engineering, design and drafting, will be performed wholly or in part by a third-party contractor rather than the operator. In addition, the overhead rate should take into account whether the operator is absorbing or billing directly those costs associated with engineering, design and drafting. These factors will impact the actual overhead costs of the operator.
For the purpose of applying an appropriate Overhead rate, platform dismantling/ abandonment is considered a Major Construction project and not operating cost.
Overhead rates are applied to the total gross cost of a single project. Total gross cost means all Direct Costs correctly charged to the project, reduced by credits for refunds or returns of unused material charged to the project. The component parts of a single project are not treated separately in determining and applying the Overhead rate, even though the costs for the various components may be charged to separate AFEs. Additions, modifications, enlargements, etc., required at some date subsequent to completion and placement in service of the project, would constitute a separate project.
COPAS MFI-21, Overhead Joint Operations provides comprehensive guidance on overhead issues. The companion Model Form Interpretation (MFI) document for each Model Form Accounting Procedure (for example, the MFI companion document for the 2005 Accounting Procedure is MFI-51) should also be consulted in determining overhead calculations..