CPE Overhead & Profit Calculation 2 — Questions and Answers
Question 1: A contractor's annual general overhead is $480,000 and projected annual revenue is $3,200,000. What overhead rate should be applied to direct costs if direct costs are 75% of revenue?
- 15%
- 20% (Correct answer)
- 25%
- 10%
Correct answer: 20%
Direct costs = $3,200,000 × 0.75 = $2,400,000; overhead rate = $480,000 / $2,400,000 = 20%.
Question 2: Which cost is most accurately classified as a project-specific (job) overhead rather than general overhead?
- CEO salary
- Office rent
- Temporary site fencing (Correct answer)
- Corporate insurance premiums
Correct answer: Temporary site fencing
Temporary site fencing is a cost incurred solely for one project, making it a job overhead item.
Question 3: A contractor applies a 12% overhead markup and a 10% profit markup sequentially to $100,000 in direct costs. What is the final bid price?
- $122,000
- $123,200 (Correct answer)
- $122,000
- $121,000
Correct answer: $123,200
Overhead: $100,000 × 1.12 = $112,000; profit: $112,000 × 1.10 = $123,200.
Question 4: When overhead is expressed as a percentage of direct labor only, which overhead items are most appropriate to include in that pool?
- Equipment depreciation and material storage
- Labor-related burdens such as supervision and small tools (Correct answer)
- Office utilities and corporate travel
- Subcontractor management fees
Correct answer: Labor-related burdens such as supervision and small tools
Labor-driven overhead items like supervision and small tools are most logically allocated as a percentage of direct labor.
Question 5: A company has fixed overhead of $200,000 and variable overhead of $1.50 per direct labor hour. If 80,000 labor hours are projected, what is the total overhead?
- $200,000
- $320,000 (Correct answer)
- $120,000
- $280,000
Correct answer: $320,000
Variable overhead = 80,000 × $1.50 = $120,000; total = $200,000 + $120,000 = $320,000.
Question 6: What is the primary risk of using prior-year overhead rates without adjustment when bidding new work?
- Overstating direct costs
- Misallocating profit between divisions
- Rates may not reflect current cost structure or volume changes (Correct answer)
- Underestimating subcontractor fees
Correct answer: Rates may not reflect current cost structure or volume changes
Prior-year rates can be distorted by one-time costs or volume levels that do not represent future conditions.
Question 7: On a cost-plus contract with a guaranteed maximum price (GMP), how does the contractor typically handle overhead recovery if actual costs come in below the GMP?
- Overhead is forfeited entirely
- Overhead is recovered on actual costs only and savings may be shared per contract terms (Correct answer)
- Overhead is recalculated at the GMP value
- The owner pays full overhead on the GMP regardless
Correct answer: Overhead is recovered on actual costs only and savings may be shared per contract terms
In a GMP contract, overhead is earned on actual incurred costs, and any savings below GMP are distributed per the contract's shared-savings clause.
CPE Overhead & Profit Calculation 2
A contractor's annual general overhead is $480,000 and projected annual revenue is $3,200,000.
What overhead rate should be applied to direct costs if direct costs are 75% of revenue?