CPE Overhead & Profit Calculation 3 — Questions and Answers
Question 1: A contractor bids $500,000 and wins the job. If actual costs run $480,000 and overhead was budgeted at 10% of direct costs ($436,364 base), what is the actual profit in dollars?
- $20,000 (Correct answer)
- $63,636
- $56,364
- $44,000
Correct answer: $20,000
Actual profit = bid price minus actual total costs: $500,000 − $480,000 = $20,000.
Question 2: Which term describes the practice of allocating a portion of home-office overhead to each project based on its share of total revenue?
- Job costing
- Proportional burden allocation
- Revenue-based proration (Correct answer)
- Activity-based costing
Correct answer: Revenue-based proration
Revenue-based proration assigns home-office overhead to projects proportionally by each project's share of total company revenue.
Question 3: A subcontractor markup of 10% is applied to cover the general contractor's overhead and profit on subcontracted work. This practice is known as:
- Escalation allowance
- Prime cost loading
- Pass-through markup (Correct answer)
- Sub-tier overhead
Correct answer: Pass-through markup
A pass-through markup is the percentage a GC adds to subcontractor costs to cover its own overhead and profit on that work.
Question 4: If a contractor's overhead rate is 18% of direct costs and direct costs for a project are $750,000, what dollar amount is allocated to overhead?
- $135,000 (Correct answer)
- $118,000
- $150,000
- $112,500
Correct answer: $135,000
$750,000 × 0.18 = $135,000 allocated to overhead.
Question 5: Which method of recovering overhead is most appropriate when projects vary widely in labor intensity but have similar material costs?
- Percentage of total direct costs
- Percentage of direct labor costs (Correct answer)
- Fixed fee per project
- Percentage of material costs only
Correct answer: Percentage of direct labor costs
Applying overhead as a percentage of direct labor captures variation in labor-intensive overhead drivers when labor intensity differs across projects.
Question 6: A contractor earns $2,000,000 in revenue and spends $1,600,000 on direct costs and $300,000 on overhead. What is the net profit margin?
- 10% (Correct answer)
- 5%
- 12.5%
- 6.25%
Correct answer: 10%
Net profit = $2,000,000 − $1,600,000 − $300,000 = $100,000; margin = $100,000 / $2,000,000 = 5%.
Question 7: Extended general conditions costs that arise from an owner-caused delay are typically classified as:
- General overhead absorbed into the base bid
- Unrecoverable sunk costs
- Compensable job overhead subject to a change order (Correct answer)
- Profit reduction items
Correct answer: Compensable job overhead subject to a change order
Extended general conditions caused by the owner are compensable and should be claimed via change order as additional job overhead.
CPE Overhead & Profit Calculation 3
A contractor bids $500,000 and wins the job.
If actual costs run $480,000 and overhead was budgeted at 10% of direct costs ($436,364 base), what is the actual profit in dollars?