3.3 Bidding, Markup, Overhead, and Profit
Key Takeaways
- Separate job overhead (project-specific indirects) from general overhead (company-wide), and never charge the same cost twice.
- Markup is a percent added to cost; margin is a percent of selling price, so 20 percent markup yields only a 16.7 percent margin.
- To hit a target margin, divide cost by (1 minus the desired margin); a 20 percent margin needs a 25 percent markup.
- Build the bid in order: direct cost, job overhead, general overhead share, profit, then contingency, bonds, and taxes.
- Bid bonds run about 5 to 10 percent while performance bonds are typically 100 percent of the contract value.
Bidding, Markup, Overhead, and Profit
Once the takeoff is priced, the contractor converts direct costs into a bid price by adding overhead and profit. Direct costs are labor, material, equipment, and subcontractors for the project. Indirect costs (overhead) keep the business running. Profit is the return for risk and capital. Mishandling these is the fastest route to insolvency, so the NASCLA business-and-project-management material treats markup math heavily.
Overhead: Job vs. General
There are two overhead buckets the exam tests:
- Job (project) overhead is directly attributable to one project: temporary toilets, the site superintendent, the jobsite trailer, dumpsters, permits, project insurance. It is often estimated as a line item.
- General (company) overhead is the cost of running the company regardless of any single job: office rent, estimator salaries, accounting, advertising, licensing. It is recovered as a percentage spread across all jobs, commonly 5 to 15 percent of revenue.
A classic trap: counting the same cost in both buckets, which double-charges the owner and loses the bid.
Markup Is Not the Same as Margin
This is the single most-tested estimating concept. Markup is a percentage added to cost. Margin (profit margin) is a percentage of the selling price. They are not equal.
- Selling price = Cost x (1 + markup)
- Margin = (Selling price - Cost) / Selling price
Worked example: Cost = 100,000. Apply a 20 percent markup: price = 100,000 x 1.20 = 120,000. The margin is (120,000 - 100,000) / 120,000 = 16.7 percent, not 20 percent. To achieve a 20 percent margin you must mark up by 25 percent: 100,000 / (1 - 0.20) = 125,000.
Markup-to-Margin Conversion Table
Use the divide-by-(1 minus desired margin) method to hit a target margin. Common conversions:
| Desired margin | Required markup on cost |
|---|---|
| 10% | 11.1% |
| 15% | 17.6% |
| 20% | 25.0% |
| 25% | 33.3% |
| 33.3% | 50.0% |
| 50% | 100% |
Reading it backward: a 50 percent markup only yields a 33.3 percent margin. Exam questions frequently swap the two terms to catch you.
Building Up the Bid
A clean bid stacks costs in order so each markup applies to the right base:
- Direct costs (labor + material + equipment + subs).
- Add job overhead (project-specific indirects).
- Add a proportional share of general overhead.
- Add profit as the final markup.
- Add contingency, bonds, and taxes per the bid documents.
Worked example: Direct cost 200,000; job overhead 15,000; general overhead at 10 percent of (215,000) = 21,500; subtotal 236,500; profit at 10 percent = 23,650; bid = 260,150 before bond and tax.
Bid Documents, Bonds, and Errors
Public and large commercial bids require surety bonds: a bid bond (often 5 to 10 percent of the bid) guarantees the contractor will sign; a performance bond (typically 100 percent of the contract) guarantees completion; a payment bond protects subs and suppliers. The lowest responsive, responsible bidder generally wins. If a clerical bid error is discovered before award, most laws let the bidder withdraw with proof rather than be forced into a losing contract.
Your total project cost is 80,000 and you want a 20 percent profit margin on the selling price. What should the bid be?
Which cost is general (company) overhead rather than job overhead?
Markup vs. Margin — The Classic Trap
These are NOT the same and the exam exploits the confusion. Markup is figured on cost; margin is figured on the selling price.
- Price = Cost × (1 + markup%)
- Margin% = Profit / Price
Example: Cost $100,000, 25% markup → Price = 100,000 × 1.25 = $125,000. The margin is 25,000 / 125,000 = 20%. So a 25% markup yields only a 20% margin. To achieve a 20% margin you mark up 25%; to achieve a 25% margin you must mark up 33.3% (markup = margin / (1 − margin)).
Overhead — Direct vs. Indirect
Direct (job) overhead is project-specific: superintendent, temporary power, dumpsters, jobsite trailer — charged to the job. Indirect (general/home-office) overhead keeps the company running: office rent, owner salary, accounting, insurance — recovered by spreading it across all jobs as a percentage. A bid that omits indirect overhead looks competitive but bankrupts the firm over time. Cover overhead first; profit is what remains above it.
Bid Assembly and Worked Total
Example bid build-up: Direct costs (labor+material+equipment+subs) $400,000; add 10% job overhead = $40,000 → $440,000; add 8% G&A overhead = $35,200 → $475,200; add 10% profit = $47,520 → bid $522,720. Note overhead and profit are usually applied sequentially, not added together as one 18% figure — applying them separately yields a higher, correct number.
Common Exam Traps
- Trap: Treating markup% and margin% as equal.
- Trap: Forgetting indirect/home-office overhead entirely.
- Trap: Adding overhead + profit as one percentage of cost instead of applying sequentially.
- Trap: Bidding below cost to "buy work" without a cash plan for the loss.
A contractor's job costs are $80,000 and they apply a 25% markup. What is the resulting profit MARGIN on the selling price?
Bid Bonds, Bid Spread, and Mistakes
Public bids usually require a bid bond (often 5–10% of the bid) guaranteeing the low bidder will sign; refusing forfeits the bond or the difference to the next bidder. A healthy bid spread between first and second place suggests an error — an abnormally low bid may signal an omitted scope. Most jurisdictions allow a bidder to withdraw a bid before award if a clerical/mathematical mistake is promptly proven, but not to merely lower it to win.