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  • Overhead, Profit, and Sales Tax Estimating Guide

    Overhead expenses must be taken into account when keeping the books for a business as well as when estimating profit.

    Overhead

    What is Overhead?

    Overhead are cost items that cannot readily be charged to any one project, but represent the cost of operating a construction company. They are incurred regardless of any specific project. There are two types of overhead items, Overhead Expense Items and Job Overhead Items.

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    Estimating Overhead Costs

    Some of the overhead costs of operating a business are one-time expenses that do not recur, or only recur once annually. Other expenses are incurred monthly. Regardless of how frequently the individual overhead items occur, they must be accounted for at monthly, semi-annual, and annual levels.

    One-time or Single Overhead Costs

    1. Overhead costs that are incurred only once or infrequently will be recorded in the month of the line item in which the expense occurs.
    2. All expenses will then be added up to a 6 Month Total for each line item.
    3. The 6 Month Total will be calculated as a Monthly Average (divide by 6)
    4. The monthly average for each line item will be multiplied by 12 to calculate a Yearly Estimate.

    Example

    A computer monitor in the main office of a construction company breaks in February, and must be replaced. The replacement cost $289.50.

    Overhead Line Item for Computers Category
      January February March April May June 6 Month Total Monthly Average Yearly Estimate
    Computers $0 $289.50 $0 $0 $0 $0 $289.50 $48.25 $579.00

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    Recurring Overhead Costs

    Examples of recurring overhead costs include wages and salaries, health insurance, and vehicle costs.

    1. Overhead costs that recur monthly will be recorded in the month of the line item in which the expense occurs.
    2. All expenses will then be added up to a 6 Month Total for each line item.
    3. The 6 Month Total will be calculated as a Monthly Average (divide by 6)
    4. The monthly average for each line item will be multiplied by 12 to calculate a Yearly Estimate.

    Example

    Officer salaries of a construction company total $16,425.00 monthly.

    Overhead Line Item for the Officer Salaries Category
      January February March April May June 6 Month Total Monthly Average Yearly Estimate
    Officer Salaries $16,425.00 $16,425.00 $16,425.00 $16,425.00 $16,425.00 $16,425.00 $98,550.00 $16,425.00 $197,000.00

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    Yearly Gross Income

    As a construction company schedules and plans their projects in advance, they hopefully have a rough idea of what their estimated yearly income from all of their projects will be. This figure is the Estimated Yearly Gross Income

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    Yearly Gross Overhead

    1. Complete the Yearly Estimate for all line items in the Overhead Expenses tab.
    2. Calculate the Estimated Yearly Gross Overhead by adding all the line item yearly estimates together.

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    Yearly Gross Wages

    1. Ensure the Wage tab of the Estimating Workbook is completed for each employee.
    2. Calculate the Estimated Yearly Gross Wages by adding the Total Net Annual Payroll Amount for each employee listed in the Wage tab together.

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    Overhead as a Percentage of Income

    1. Estimate both Yearly Gross Income and Yearly Gross Overhead.
    2. Calculate Overhead as a Percentage of Income by dividing Yearly Gross Overhead by Yearly Gross Income.

    Example

    A construction company has estimated the following values for their yearly overhead.

    Yearly Overhead Estimate
    Estimated Yearly Gross Income $2,586,000.00
    Estimated Yearly Gross Overhead $465,385.73
    Estimated Yearly Gross Wages $356,891.19
    Overhead as a Percentage of Income 18%

    Overhead as a Percentage of Income would be calculated as follows:

    465,385.73 ÷ 2,586,000 = 0.17996

    In this example, Overhead as a Percentage of Income is 18%

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    Which Line Items Do I Add Overhead To?

    Construction firms must account for their administrative costs of doing business. Because their business is construction, it is appropriate to add in an overhead charge to line items in the estimate that require the use of company overhead resources.

    The following considerations should be taken into account when choosing which items to add the overhead up-charge to. Note that there is no clear answer to any of these questions, and that some of the choices on line item overhead will vary from project to project in order to win bids over competitors.

    • Should the company add overhead over their costs for labor items?
    • Should the company add overhead over their costs for material?
    • If a line item represents a cost that does not require the work of company employees (eg. Building Permits, Insurance, etc.) should they add overhead on top of the fees?
    • Subcontractors require bid leveling and jobsite supervision by a company employee. Should overhead be added on the cost of hiring subcontractors to account for that work?

    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.

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    Profit

    Profit is the balance of money paid to the construction company after all other expenses are paid. The amount of profit is variable depending upon factors, including:

    How Much Profit Should I Add?

    In general, for residential projects in decent market conditions and stable demand, 10% profit is a good starting number to use in estimating your final figures on a project estimate.

    Construction is a business in which you are supposed to make a fair, reasonable profit.

    Frank Degostino

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    Which Line Items Do I Add Profit To?

    Construction firms may choose to add a profit percentage to every line item in every phase of construction. Some may choose to offer certain materials or services at cost (ie. no profit) in order to make their estimate and resulting bid for the project more competitive.

    The following considerations should be taken into account when choosing which items to add the profit up-charge to. Note that there is no clear answer to any of these questions, and that some of the choices on line item profit will vary from project to project in order to win bids over competitiors.

    • Should the company add profit over their costs for labor items?
    • Should the company add profit over their costs for material?
    • If a line item represents a cost that does not require the work of company employees (eg. Building Permits, Insurance, etc.) should they add profit on top of the fees?
    • Subcontractors require jobsite supervision by a company employee. Should profit be added on the cost of hiring subcontractors to account for that employee supervision?

    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. Instead, make up profit on the labor costs.
    • 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.

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    Sales Tax

    Sales tax rate is determined by the local and state governments where the project is being completed. It is a cost that must be accounted for, and whether it is covered by the client or the construction company is a decision that must be made when completing a project estimate.

    Which Line Items Do I Add Sales Tax To?

    Sales tax must be paid. It is the law.

    Guidelines for Adding Sales Tax to Line Items

    • 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.

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    This content is provided to you freely by BYU-I Books.

    Access it online or download it at https://books.byui.edu/construction_estimat/overhead__profit_est.