Overhead and Profit for Contractors
Overhead and Profit for Contractors
(OP)
How much can a contractory typically charge for profit and overhead on a quote that has been submitted by his subcontractor. I have a situation where I am reviewing a quote for a potential change to the contract and the contractor has charged 20% profit and overhead. The specs are not very clear about how much they can charge.





RE: Overhead and Profit for Contractors
Typically, O&P is charged at a markup of 10 + 10, which is 21%.
RE: Overhead and Profit for Contractors
20% is not an unfair markup for labor equipment and material. Just be sure how the contractor is developing rates for equipment. Blue Book and AEG have standard equipment rates. Subcontractor markup is generally less (typically5-10%. This is because the sub usually caries overhead in his price and the contractor should not have a significant amount of overhead to administer.
RE: Overhead and Profit for Contractors
Remember that most head contractors allow for a profit of 3% on a contract value when bidding competitively. This may sound meagre but you need to consider that the profit is not on the value of the works but the capital employed in undertaking the work.
A $100 million project may take $10million of capital to undertake. Thus a 3% profit of $3million represents 30% profit on the capital employed. But the job has to go well. If a loss is made then that is even worse than appears on paper as it is a loss on the capital employed.
This is why contractors want up front payments and that is why they front end load the value of a project. This way they get your money as the capital to employ.
Overhead depends upon the level of supervision, quality assurance, insurance risks etc. The contractor needs to demonstrate that any variation overhed componenet wasnt merely as acting as a post box.
RE: Overhead and Profit for Contractors
2) Contracting is a very high risk capital intensive business. Business cyles flucutate much more than many other industries. Nobody is in this for 3%
3) Perhaps in residential work contractors can get up front payments, but in most heavy highway contracts, invoices are monthly and payment is 30 to 60 days later. Contractors do try to get as much money as early as possible, but it generally is not a significant percentage of the contract, is used for costs that wont be paid until later in the contract and supports administrative costs of starting the work.
4) There is not sufficent cash flow in a project to do a $100 million project on 10 million cash.Further Contractors, banks and surities do not look at profit on cash flow. Profit for a job is project revenues less direct project costs divided by direct project costs. Cash flow is never considered.
5) If a contractor makes 10% overhead and 10% profit on a project, and the first 10% truely represents his overhead cost on the project, Then any minority share holder dividends would be paid and taxes would be paid (neiher would come out of OH) thus the net profit would be 5-4% net.
Thus I think the 10% + 10% sounds reasonable.
RE: Overhead and Profit for Contractors
Labor - 33%
Equipment - 15%
Materials - 15%
Subs - 5%
Without clear contract terms you'll have to negotiate. 20% is not out of line but is higher than many contracts allow.
Look at it another way, does 20% on the subcontractor's quote provide enought $$ to cover the mh required for the general to 1) coordinate the quote, 2) issue the subcontract change order 3) deal with the sub and his questions 4) integrate the subs c.o. work with the existing scope? Usually it is not anywhere near enough to cover the real cost of implementing a change.
This OH/Profit discussion has nothing to do with what is done when competitively bidding the work. Then it is a matter of risk and what the market will bear. Our goal is to get the biggest profit and leave the least amount on the table. It is a business afterall.
RE: Overhead and Profit for Contractors
The short answer is, you need to discuss this with the contractor, figure out what effect the change has on his work and find a fair solution.
RE: Overhead and Profit for Contractors
Made the stockholders happy - at the expense of the taxpayers.
RE: Overhead and Profit for Contractors
The G&A pays for many things: risk, insurance, management oversite, contracts, supervision
The fairness depends on the value of the contract change, the contract, and how it changes the scope of the existing work. I have seen major contracts for the U.S. DOD that have G&A + Profit greater then 20%.
RE: Overhead and Profit for Contractors
RE: Overhead and Profit for Contractors
RE: Overhead and Profit for Contractors
You can ask for a breakdown, but be aware that if you decide to go T&M and they mess up it's on you.
The bottom line is that a change in scope doesn't limit you to one subcontractor (in my experience). Is it a big $ value, percentagewise?
RE: Overhead and Profit for Contractors