7.2 Estimating, Bidding & Markup

The Estimating Process

Estimating is the process of predicting what a project will cost before bidding it. A sound estimate follows a repeatable sequence:

1. Review the plans and specifications — read every sheet, note details, and flag ambiguities before measuring anything.
2. Perform the quantity takeoff — measure quantities from the drawings.
3. Price the quantities — apply current unit costs for materials, labor, and equipment.
4. Add subcontractor quotes — solicit and evaluate bids from subs.
5. Add indirect costs and overhead — field supervision, insurance, bonds, home office overhead.
6. Apply markup — overhead and profit percentage.
7. Review and submit — check for completeness and errors before the bid deadline.

Quick Answer: Estimate in this order: review plans, take off quantities, price them, add subcontractor quotes, add overhead, apply markup, and review before bidding.

Quantity Takeoff

A quantity takeoff is the process of calculating material, labor, and equipment quantities from the drawings. The estimator measures areas, lengths, counts, and volumes from the plans and produces a structured list before any cost is assigned. For a residential frame, that means counting studs, linear feet of plate, square feet of sheathing, cubic yards of concrete, and hours of labor — each derived from the drawn geometry. Accuracy here drives everything downstream: a missed 200 square feet of drywall cannot be recovered by a better markup percentage.

Takeoff Checklist

Direct vs. Indirect Costs

• Direct costs are expenses tied to a specific project: materials, labor, equipment, and subcontractor bids. If you can point to the job it belongs to, it is direct.
• Indirect costs (overhead) cannot be tied to one job and must be allocated across all active projects. They split into field (or job) overhead — project superintendent, trailer, temporary utilities, port-a-john — and home office overhead — office rent, accounting, the estimator's salary, general liability insurance.

Misclassifying a cost distorts job profitability reports. A superintendent's truck is field overhead for the job they are on; the owner's truck is home office overhead.

Markup: Overhead + Profit

Markup is the percentage added to direct costs to cover overhead and profit. It is applied to the total of direct costs after subcontractor quotes are included.

Quick Answer: Markup = overhead + profit, applied as a percentage on top of total direct costs.

Worked Example

Suppose a small residential remodel has the following direct costs:

The contractor carries 12% overhead and wants 8% profit, for a combined 20% markup.

Bid price = Total direct costs × (1 + Markup %)

Bid price = $44,000 × 1.20 = $52,800

Of the $8,800 added on top of direct costs, that amount covers the contractor's overhead contribution and profit. If the contractor underestimates overhead and only applies 10% markup, the bid drops to $48,400 — $4,400 less — and the missing $4,400 comes straight out of profit (or, if overhead is truly 12%, becomes a loss).

Margin vs. Markup — Not the Same

Markup is a percentage of cost. Margin is a percentage of price (revenue). In the example above, $8,800 ÷ $52,800 = 16.7% gross margin, even though the markup was 20%. Bidders who confuse the two systematically underprice.

Bid Strategy

Lump-Sum (Stipulated Sum) Bidding

A lump-sum bid is a single fixed price for the entire scope. The contractor bears the cost risk — if labor or materials run over, profit shrinks. Owners like lump-sum because the price is certain; contractors must build in contingency for the risk they accept.

Unit-Price Bidding

A unit-price bid quotes a price per installed unit (per cubic yard of concrete, per linear foot of trench). The final contract amount is the unit price multiplied by the quantity actually installed. Quantity risk is shared with the owner, which is why unit-price bids are common when quantities are uncertain (utility work, excavation where rock may be encountered).

Choosing a Strategy

Common Bidding Errors

• Missing items in the takeoff — forgetting a scope line (e.g., vapor barrier under slab) is the single most common cause of lost profit.
• Using stale material prices — lumber, copper, and fuel swing fast; a quote from three months ago may be significantly low.
• Ignoring site conditions — tight access, poor soils, or a high water table add labor and equipment cost that the plans do not show.
• Underestimating labor productivity — assuming a crew can hang 1,000 square feet of drywall per day when the job site conditions allow 600.
• Forgetting overhead or bond costs — an overhead load applied to a forgotten cost is still a loss.
• Arithmetic and transposition errors — copying $14,500 as $1,450 has sunk many bids. Always have a second estimator review before submission.