CEC Overhead & Profit Calculation 3 — Questions and Answers
Question 1: A contractor wants a 12% profit on the selling price (not cost). If direct costs plus overhead total $88,000, what should the bid price be?
- $98,560
- $100,000 (Correct answer)
- $104,762
- $112,000
Correct answer: $100,000
Bid price = $88,000 ÷ (1 − 0.12) = $88,000 ÷ 0.88 = $100,000.
Question 2: Which of the following best describes the break-even point for a construction company?
- The point where direct costs equal labor costs
- The revenue level at which total costs equal total income with zero profit (Correct answer)
- The bid amount needed to cover materials only
- The overhead percentage that equals the profit percentage
Correct answer: The revenue level at which total costs equal total income with zero profit
Break-even is when total revenue exactly covers all costs—direct and overhead—leaving zero net profit.
Question 3: A contractor's job overhead for a project includes: superintendent salary $15,000, portable toilets $600, temporary power $1,200, and job trailer $2,400. What is the total job overhead?
- $17,400
- $18,600
- $19,200 (Correct answer)
- $19,800
Correct answer: $19,200
$15,000 + $600 + $1,200 + $2,400 = $19,200.
Question 4: Why might a contractor apply a HIGHER profit margin on a risky or complex project?
- To compensate for lower overhead on the project
- To account for the increased likelihood of cost overruns and uncertainties (Correct answer)
- Because complexity reduces direct costs
- To offset lower subcontractor bids on the project
Correct answer: To account for the increased likelihood of cost overruns and uncertainties
Higher risk projects warrant higher profit margins to compensate for potential cost overruns and uncertainties.
Question 5: If a contractor's markup on cost is 25%, what is the equivalent margin (profit as a percentage of selling price)?
- 20% (Correct answer)
- 22%
- 25%
- 30%
Correct answer: 20%
Margin = markup ÷ (1 + markup) = 0.25 ÷ 1.25 = 20%.
Question 6: A contractor's annual fixed overhead is $300,000. If volume increases by 20% next year with no change in overhead, what happens to the overhead rate per dollar of direct cost?
- It increases by 20%
- It decreases by approximately 17% (Correct answer)
- It stays the same
- It doubles
Correct answer: It decreases by approximately 17%
Higher volume spread over fixed overhead reduces the overhead rate; $300,000 ÷ (1.2 × base) = rate drops ~17%.
Question 7: On a lump-sum contract, where does the risk of overhead cost overruns primarily fall?
- The owner
- The contractor (Correct answer)
- The architect
- The surety bond company
Correct answer: The contractor
On a lump-sum contract, the contractor bears the risk if actual overhead exceeds the estimated amount included in the bid.
CEC Overhead & Profit Calculation 3
A contractor wants a 12% profit on the selling price (not cost).
If direct costs plus overhead total $88,000, what should the bid price be?