The essential element in the construction business is to be profitable and competitive. If the markup is too low, there may be an insufficient cushion to protect the contractor if actual costs exceed those estimated. Often the low bidder is the one with the least markup for profit, the lowest overhead, or a combination of the two.
The average profit margin in the construction industry over the past few years has been about 5%. Profit should be sufficient to provide the owners with a return on their investment and provide for the continued growth of the business.
Typically, the same markup for profit applies to all jobs, unless a reason exists to do otherwise. If the desirability of a project is low or certain abnormal risks exist, the markup for profit may be increased. If, on the other hand, the company needs work badly to keep valuable employees and cover company overhead, a lower than normal markup may be added.
To illustrate the use of these overhead percentages in the bidding process, assume that a proposed job has $175,000 in direct costs, and a 12% before tax profit is desired. The following calculations will obtain the correct amount to bid:
Step 1 figure: materials, labor, equipment (direct costs)
Step 2 figure: project overhead
Step 3 add: company overhead
$175,000 in direct costs
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