Most people don't understand the costs that go into "overhead" and "profit" for a GC.
Here is a good summary:
Contractor's Cost Estimation and Pricing
The contractor initially estimates the hard costs, which include money paid out for labor and materials required to complete the job. These costs are then marked up to determine the bid price. The markup accounts for overhead and profit.
Overhead and Profit Components Overhead This term refers to all the indirect costs of doing business that aren't tied to a specific job. Examples include: Costs for trucks, tools, and equipment. Office expenses, bookkeeping, and accounting. Advertising, training, legal, and insurance fees. Other business-related costs. If a contractor undercharges and doesn't cover overhead costs, their business may not be sustainable.
Profit: This is the net profit or the amount left for the owner after deducting all hard and soft costs of completing the job. The company owner's labor cost is treated differently depending on their role: If they work part-time on the job, their labor cost is a hard cost. If they work in the office and draw a salary, this would be considered overhead.
Calculating Overhead and Profit Different companies use various methods to calculate overhead and profit. For instance: Some companies categorize labor burden (employee benefits and taxes) as a direct job cost, while others consider it overhead. Some companies markup materials, labor, and subcontractor costs, others may only markup labor. Overhead assignment could be based on job duration rather than cost. Some may use a line-item expense for the contractor's management fee instead of "profit." Regardless of the method used, it is vital for a company to earn enough to cover all costs, with net profit left to reward the owner and cover future needs.
Typical Overhead and Profit Rates
The "right" amount of overhead and profit varies and tends to be higher for larger companies. Small companies, particularly those where the owner is onsite daily, usually work primarily for wages, with modest additional profit. According to a national survey by NAHB, the average net profit on land-and-house packages was about 9%. Overhead, marketing, and sales accounted for another 10%. Custom builders typically work on smaller margins (15% to 20% for overhead and profit on new homes), while remodeling contractors usually charge higher rates. In difficult times, some contractors may reduce their markup to attract more work with lower prices.
A.Tepler
HomeQwest Real Estate, Building & Development Companies
4020 Del Prado Blvd S. Unit B2, Cape Coral, FL 33904
homeqwestrealty@gmail.com | O. (239)770-5429 | www.homeqwest.com
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