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Overhead Question and Answer

December 22, 2007  |  from The Construction Contractor's Digest

Question:

Hello Matt;

After reading your book, I have a question regarding dual overhead percentage and Total Mark-up percentages. My mark-up percentage calculates to 35%. For my dual overhead calculations I am using a 8% profit, 7% material/sub-contractor & 20% Labor and equipment. This totals to 35%. The thing that I have noticed is that if I take my raw labor/equipment, materials/sub-contract costs, & take them x 1.35 this total number is higher than if I accumulate the percentages separately on my spreadsheet. Is my process correct? Is this the benefit of the dual overhead and still covering my required overhead?

I continue to enjoy the Digest.

Hope this finds you & your family with things going well.

Answer:

Good morning.

Certainly. Your math is correct. As you know, you are placing parts of the total percentage number on smaller numbers. Therefore, the result is less than taking the total percentage and multiplying it by total (larger) number.

The dual rate is the only way to arrive at a true cost or breakeven for the job. From breakeven, we add the profit margin we believe we can get or at least gain entry into a negotiation.

Many contractors have fat or contingency on each part of the total number. This is good in a steady economy but, can be a business mistake in a poor economy. Said another way, if a negotiator knows his breakeven or "walk away number" he can play the poker game with confidence whatever the economic conditions.

Further discussion and examples in the book (as you know).

Hope all continues to go very well.

Sincerely,

Matt

Filed: Best-Practices Estimating Strategy