Overhead & Profit Calculation Flashcards
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Read the first 7 Overhead & Profit Calculation flashcards as text
What distinguishes 'contingency' from 'profit' in a construction estimate?
Answer: Contingency covers unknown cost risks; profit is the planned return to the contractor
Contingency addresses uncertainty in cost estimates, while profit is the deliberate financial return targeted by the contractor.
A contractor uses an activity-based costing (ABC) approach for overhead. What is the key advantage over a single company-wide rate?
Answer: It allocates overhead more accurately by tying costs to specific activities that consume resources
ABC assigns overhead to the activities that drive those costs, producing more precise cost information per project or work type.
On a negotiated contract, an owner requests an open-book audit of overhead charges. Which document best substantiates the contractor's overhead rate?
Answer: Audited financial statements and overhead schedule
Audited financial statements and the accompanying overhead schedule provide third-party-verified support for claimed overhead rates.
A contractor's overhead costs are $600,000 per year on $4,000,000 in direct costs. If a new project has $250,000 in direct costs, how much overhead should be allocated?
Answer: $37,500
Rate = $600,000 / $4,000,000 = 15%; allocation = $250,000 × 0.15 = $37,500.
When a contractor deliberately bids low overhead and profit to win a contract, planning to recover margin through change orders, this practice is commonly called:
Answer: Low-bid strategy with change-order recovery
Deliberately underbidding with the intent to recover margin through change orders is known as a low-bid strategy with change-order recovery (sometimes called 'buying the job').
Which of the following best describes 'fade' in estimating?
Answer: The difference between bid-day estimated profit and actual profit at project completion
Fade is the erosion of expected profit from bid-day projections to final project outcome, often caused by cost overruns or missed productivity targets.
A contractor's total bid is $1,200,000. If direct costs are $900,000, overhead is $180,000, and profit is $120,000, what is the profit as a percentage of the bid price?
Answer: 10%
Profit margin on selling price = $120,000 / $1,200,000 = 10%.