Pricing a job correctly is where a contracting business makes or loses money, and it is where the Business and Finance exam puts a lot of arithmetic. The content outline lists "Determine Business Overhead" and "Preparing Bids/Proposals" in Area B (26% of the exam) and "Track Job Costs" in Area D (32%). This page works through the four ideas behind most of those questions: direct vs. indirect cost, overhead allocation, markup vs. margin, and break-even.
Direct costs vs. overhead
| Direct (job) costs | Indirect costs (overhead) |
|---|---|
| Materials installed on the job | Office rent and utilities |
| Field labor and its burden (payroll taxes, workers' comp, benefits) | Office salaries |
| Subcontracts | Advertising, dues, phones |
| Equipment used on the job | Accounting and legal fees |
| Job-specific permits and general conditions (superintendent, temporary facilities) | Insurance and interest not charged to jobs |
General conditions (the superintendent, job trailer, temporary power and similar items for one project) are a job cost even though they are not "bricks and sticks." They are usually figured by time: weekly cost × weeks on the schedule.
Labor burden turns a wage into a real cost. If a carpenter earns $25.00 per hour and burden is 32% of wages, the cost is $25.00 × 1.32 = $33.00 per hour. See payroll tax and workers' compensation for the pieces of burden.
Allocating overhead
Overhead has to be recovered from jobs. The usual approach is a predetermined rate based on a budget.
Overhead rate = budgeted annual overhead ÷ budgeted allocation base
Example: overhead as a percentage of direct cost
A contractor budgets $360,000 of overhead and $3,000,000 of direct job costs for the year.
Rate = $360,000 ÷ $3,000,000 = 12% of direct cost
Example: overhead on direct labor
Same overhead, but the base is $900,000 of budgeted direct labor. Rate = $360,000 ÷ $900,000 = 40% of direct labor. A job with $45,000 of direct labor is charged $45,000 × 40% = $18,000 of overhead.
The exam will tell you which base to use. Read carefully.
Building a bid price
Worked example
Estimated direct costs for a job are $400,000. The contractor applies overhead at 12% of direct cost, then profit at 10% of cost plus overhead.
Step 1. Overhead. $400,000 × 12% = $48,000 Step 2. Total cost. $400,000 + $48,000 = $448,000 Step 3. Profit. $448,000 × 10% = $44,800 Step 4. Bid price. $448,000 + $44,800 = $492,800
Shortcut: $400,000 × 1.12 × 1.10 = $492,800.
The trap is adding the percentages first: $400,000 × 1.22 = $488,000. That is wrong because profit is figured on cost plus overhead, not on direct cost alone.
Markup vs. margin
This is the most tested pricing concept on the exam, and the definitions are not interchangeable.
- Markup is profit as a percentage of cost.
- Margin (gross profit margin) is profit as a percentage of selling price.
| Formula | |
|---|---|
| Price from markup | Cost × (1 + markup) |
| Price from margin | Cost ÷ (1 − margin) |
| Margin from markup | Markup ÷ (1 + markup) |
| Markup from margin | Margin ÷ (1 − margin) |
Worked example
A job costs $80,000.
- At a 20% markup: price = $80,000 × 1.20 = $96,000. Profit $16,000. Margin = $16,000 ÷ $96,000 = 16.7%.
- At a 20% margin: price = $80,000 ÷ 0.80 = $100,000. Profit $20,000. Markup = $20,000 ÷ $80,000 = 25%.
A contractor who wants a 20% margin but marks up 20% leaves $4,000 on the table on this job.
Conversion table
| Markup on cost | Equivalent margin on price |
|---|---|
| 10% | 9.1% |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 33.3% | 25.0% |
| 50% | 33.3% |
| 100% | 50.0% |
Margin is always smaller than the matching markup.
Break-even analysis
Break-even is the revenue (or volume) where gross profit exactly covers fixed overhead, so net profit is zero.
Break-even revenue = fixed overhead ÷ gross margin (or contribution margin) ratio
Example: revenue
Fixed overhead is $360,000 a year. Jobs average an 18% gross margin after direct costs.
Break-even = $360,000 ÷ 0.18 = $2,000,000 of revenue.
Check: 18% × $2,000,000 = $360,000 of gross profit, which covers overhead exactly.
Example: target profit
To earn $90,000 of pre-tax profit on top of break-even:
Required revenue = ($360,000 + $90,000) ÷ 0.18 = $2,500,000
Example: units
A contractor installs water heaters at $1,400 each with variable cost of $1,050 each. Fixed costs assigned to this line are $42,000 per year.
Contribution per unit = $1,400 − $1,050 = $350. Break-even = $42,000 ÷ $350 = 120 units.
Wrong answers divide by the price or by the variable cost instead of the contribution per unit.
Tracking job costs
Once the job starts, the estimate becomes the budget. Comparing actual to estimate by cost code tells you where money is being lost while there is still time to act.
Cost overrun % = (actual − estimate) ÷ estimate
A job estimated at $82,000 that comes in at $88,560 overran by $6,560 ÷ $82,000 = 8%.
Job cost reports also feed percentage of completion revenue recognition, so poor job costing produces poor financial statements.
Quick review
| Concept | Remember |
|---|---|
| Overhead rate | Budgeted overhead ÷ budgeted base |
| Profit on cost plus overhead | Multiply in sequence, do not add percentages |
| Markup | Profit ÷ cost |
| Margin | Profit ÷ price |
| Break-even | Fixed costs ÷ margin ratio |
Practice pricing math
Our Florida Business and Finance Exam Prep includes original overhead, markup, margin and break-even questions, each with worked steps, and 90 days of practice across the full exam. Related: bid math, financial statements and the B&F exam overview.
Practice questions
Direct job costs are estimated at $200,000. The contractor adds overhead at 15% of direct cost, then profit at 10% of (cost + overhead). What is the bid price?
- A$250,000
- B$253,000
- C$230,000
- D$255,000
Show answer
Answer: B. Overhead: $200,000 x 1.15 = $230,000. Profit: $230,000 x 1.10 = $253,000. Adding 15% + 10% = 25% to cost ($250,000) ignores that profit is figured on cost plus overhead.
Source: Standard estimating arithmetic (verified in Python)
A contractor wants a 20% gross profit MARGIN (profit as a percentage of selling price) on a job that costs $80,000. What selling price and what MARKUP on cost does that require?
- A$100,000 selling price; 25% markup
- B$96,000 selling price; 20% markup
- C$100,000 selling price; 20% markup
- D$96,000 selling price; 25% markup
Show answer
Answer: A. Price = cost / (1 - margin) = $80,000 / 0.80 = $100,000. Markup = profit / cost = $20,000 / $80,000 = 25%. Marking cost up 20% ($96,000) yields only a 16.7% margin.
Source: Standard markup vs. margin principle (verified in Python)
A 25% markup on cost is equivalent to what gross margin on selling price?
- A25%
- B20%
- C33.3%
- D15%
Show answer
Answer: B. Margin = markup ÷ (1 + markup) = 0.25 ÷ 1.25 = 20%. Markup and margin are not equal; 33.3% is the markup needed for a 25% margin.
Source: Standard accounting principles
Annual fixed overhead is $300,000. Each job's contribution margin ratio (revenue minus variable costs, as % of revenue) is 20%. What annual revenue is needed to break even?
- A$360,000
- B$1,500,000
- C$6,000,000
- D$240,000
Show answer
Answer: B. Break-even revenue = fixed costs ÷ contribution margin ratio = 300,000 ÷ 0.20 = $1,500,000. $360,000 merely adds 20% to fixed costs.
Source: Standard accounting principles
A contractor installs units selling for $1,200 each with variable cost of $900 each. Fixed costs are $45,000 per year. How many units must it install to break even?
- A150 units
- B50 units
- C38 units
- D500 units
Show answer
Answer: A. Contribution per unit = 1,200 − 900 = $300; break-even = 45,000 ÷ 300 = 150 units. 50 units divides by the $900 variable cost; 38 divides by the price.
Source: Standard accounting principles
A contractor allocates overhead on direct labor cost. Budgeted annual overhead is $240,000 and budgeted direct labor is $800,000. A job incurs $45,000 of direct labor. How much overhead should be applied to the job?
- A$10,385
- B$20,000
- C$13,500
- D$10,800
Show answer
Answer: C. Overhead rate = $240,000 / $800,000 = 30% of direct labor. Applied overhead = $45,000 x 30% = $13,500.
Source: Standard construction accounting principle (calculation verified in Python)
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