A general contractor's bid includes: Direct costs $485,000, Overhead 18%, Profit 8%. What is the total bid amount?
Correct Answer
C) $610,610
Total bid = Direct costs × (1 + Overhead % + Profit %) = $485,000 × (1 + 0.18 + 0.08) = $485,000 × 1.26 = $611,100. However, if overhead and profit are compounded: $485,000 × 1.18 × 1.08 = $610,610.
Why This Is the Correct Answer
The correct answer is A ($610,610) because overhead and profit are typically applied as compounded percentages in construction bidding. First, overhead is applied to direct costs: $485,000 × 1.18 = $572,300. Then profit is applied to the subtotal (direct costs + overhead): $572,300 × 1.08 = $610,610. This compounding method reflects the reality that profit should be earned on both direct costs and overhead expenses.
Why the Other Options Are Wrong
Option A: $608,850
Option B ($611,100) represents the additive method where overhead and profit percentages are simply added together (18% + 8% = 26%) and applied once to direct costs. While this method exists, the compounding method is more commonly used in professional construction bidding as it ensures profit is earned on overhead costs as well.
Option D: $611,100
Option C ($625,400) is incorrect as it appears to use an inflated percentage calculation that doesn't match either the additive or compounding methods for applying overhead and profit to the given direct costs.
Memory Technique
Remember 'OH then P' - apply Overhead first, then Profit on the new total. Think of it as profit should be earned on everything, including overhead costs.
Reference Hint
Florida Building Construction Standards and Practices, Chapter on Cost Estimating and Bidding Procedures
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