The difficult part in accounting for overhead, profit, and sales tax is that the estimator and construction company may choose whether or not to apply those adjustments to individual line items. The following section includes basic principles from the Overhead, Profit, and Sales Tax Estimating Guide.
Sales tax must be paid. It is the law.
Remember, sales tax must be accounted for and paid by someone. If it is not included in line items as outlined above, the client will not pay them. In this scenario the construction company will pay sales tax, which will cut into profit.
Once adjusted costs are applied to each line item using the guidelines above, the total project cost can be caculated. Keep in mind that this may not be the final figure used for the final estimate.
Strategies for adjusting the project total can result in small or large changes, depending on how they are executed.
Select specific line items to which overhead and profit have been added, and remove one or both of those adjustments from the line item.
Example
The base costs of the Concrete Phase of a project have been estimated. Following the guidelines for overhead, profit, and sales tax, the adjusted cost for Concrete Work is as follows:
The total adjusted cost as configured is $13,607.63. If the Project Manager or Owner insisted this figure was out of budget, and it should be closer to $13,500, adjustments must be made to reach that target.
Exterior Flatwork Labor has an adjusted total of $1,479.12.
In order to get the cost for this phase to come in under the budget of $13,500, you could omit profit from Exterior Flatwork Labor (a single line item). Doing so would adjust the line item down to $1,359.12, and the Concrete work total to $12,487.63.
Strategies for larger adjustments may include, but are not limited to, the following:
Ultimately, decisions on how adjustments to a project estimate are made do not lie with the estimator, but understanding how to do it will allow the estimator to give valuable insights to those decisionmakers.
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Access it online or download it at https://books.byui.edu/construction_estimat/adjusting_total_cost.