Basic Principles for Adjusting Costs for Overhead, Profit, and Sales Tax

Recommended Guidelines for Overhead

• No overhead for costs and fees for the project that do not require the labor of company employees (eg. Architecture, Jobsite Facilities, etc.)
• No overhead for materials. Instead, make up overhead costs on the labor costs.
• Charge overhead for all labor costs.
• Charge overhead for all subcontractor costs because a company employee will bid level and will be onsite to supervise the work.
• Charge overhead for all allowance items because company employees will be buying the material and installing it.

Recommended Guidelines for Profit

• No profit for costs and fees for the project that do not require the labor of company employees (eg. Architecture, Jobsite Facilities, etc.)
• No profit for materials.
• Charge profit for all labor costs.
• Charge profit for all subcontractor costs because a company employee will be onsite to supervise the work.
• Charge profit for all allowance items because company employees will be buying the material and installing it.

Guidelines for Adding Sales Tax to Line Items

Sales tax must be paid. It is the law.

• Add sales tax to all materials, fees, and allowances.
• Do not add sales to to labor items.
• Add sales tax for special line items with especially large tax loads (eg. Real Estate Fees)

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.

Scenarios Where Changing the Project Estimate Total May Be Appropriate

• The client's budget is lower than the project estimate total
• High competition among construction companies may require forgoing profit on some line items in order to win a project bid.
• Any other number of reasons where the project estimate does not fall in line with the client's budget.

How Can the Project Total be Adjusted?

Strategies for adjusting the project total can result in small or large changes, depending on how they are executed.

Small Adjustments

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.

Larger Adjustments

Strategies for larger adjustments may include, but are not limited to, the following:

• Remove overhead or profit from an entire phase of construction.
• Adjust the profit % for the entire project.