A general contractor is preparing a bid for a commercial project. The estimated direct costs are $480,000, overhead is calculated at 12%, and the desired profit margin is 8%. What should be the total bid amount?
Correct Answer
D) $576,000
Total bid = Direct costs + Overhead + Profit. Overhead = $480,000 × 0.12 = $57,600. Profit = $480,000 × 0.08 = $38,400. Total bid = $480,000 + $57,600 + $38,400 = $576,000.
Why This Is the Correct Answer
The correct answer is A ($576,000) because it properly calculates the total bid by adding all three components: direct costs, overhead, and profit. The overhead of $57,600 (12% of $480,000) and profit of $38,400 (8% of $480,000) are both calculated as percentages of the direct costs, then added to the base direct costs. This follows the standard construction bidding formula where overhead and profit percentages are applied to the direct cost base.
Why the Other Options Are Wrong
Option B: $537,600
This amount ($537,600) appears to only include direct costs plus overhead ($480,000 + $57,600), but excludes the profit margin entirely, resulting in an underbid that would not meet the contractor's desired 8% profit target.
Option C: $556,800
This amount ($518,400) only includes direct costs plus profit ($480,000 + $38,400), but excludes the 12% overhead costs, which would result in the contractor not recovering their indirect expenses and operating costs.
Memory Technique
Use the acronym 'DOP' - Direct costs, Overhead, Profit. Think 'Don't Omit Profit' to remember all three components must be included in your total bid calculation.
Reference Hint
Florida Building Code, Business and Finance for Contractors chapter, or contractor license study guide sections on cost estimating and bidding procedures
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