A general contractor's monthly overhead costs are $45,000. The contractor completes an average of $380,000 in work monthly. What overhead percentage should be applied to new bids?
Correct Answer
D) 11.8%
Overhead percentage = Monthly overhead ÷ Monthly revenue = $45,000 ÷ $380,000 = 0.118 = 11.8%.
Why This Is the Correct Answer
Overhead % = Monthly Overhead ÷ Monthly Direct Cost Volume = $45,000 ÷ $380,000 = 0.1184... ≈ 11.8%. This percentage is applied to direct costs on new bids so each project recovers its proportional share of the contractor's fixed and variable overhead.
Why the Other Options Are Wrong
Option A: 13.2%
13.2% corresponds to approximately $45,000 ÷ $341,000 — an incorrect denominator. Using this rate would over-recover overhead and make bids less competitive.
Option B: 8.5%
8.5% would only recover about $32,300 per month ($380,000 × 0.085), leaving $12,700 of monthly overhead unrecovered. The contractor would systematically lose money on overhead.
Option C: 15.6%
15.6% over-recovers overhead by approximately $14,280 per month. While padding overhead appears safe, it significantly inflates bids and reduces the contractor's ability to win projects competitively.
Memory Technique
Think of it as overhead as a percentage OF the work you do. Overhead on top, work volume on bottom. $45K ÷ $380K. Move the decimal: 45 ÷ 380 = 0.118 = 11.8%.
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