A subcontractor submits a bid of $125,000 for electrical work but has a history of 15% cost overruns. If you include a 10% contingency for this trade, what amount should you include in your estimate?
Correct Answer
B) $143,750
Base bid with typical overrun: $125,000 × 1.15 = $143,750. Since you're already accounting for the subcontractor's history of overruns, the 10% contingency would be redundant and not added again.
Why This Is the Correct Answer
The correct approach is to apply the subcontractor's known 15% cost overrun history to the base bid: $125,000 × 1.15 = $143,750. Because this calculation already incorporates the historical overrun pattern, adding a separate 10% contingency on top would double-count the risk for the same underlying issue. The 10% contingency is intended for unknown risks, not for known patterns already reflected in the adjusted estimate. This principle — avoiding redundant contingency — is central to accurate estimating.
Why the Other Options Are Wrong
Option A: $156,250
$156,250 results from applying both the 15% overrun AND the 10% contingency ($125,000 × 1.15 × 1.10 = $156,250). This double-counts the risk since the 15% adjustment already accounts for the subcontractor's history. A contingency should only cover unknown risks, not patterns already quantified.
Option C: $137,500
$137,500 applies only a 10% contingency to the base bid ($125,000 × 1.10) while ignoring the known 15% historical overrun entirely. This underestimates the true expected cost and fails to account for documented performance history.
Option D: $158,125
$158,125 does not correspond to any standard calculation method. It appears to combine figures inconsistently. Estimates must follow a logical, reproducible methodology — applying the known overrun factor once to the base bid is the correct and defensible approach.
Memory Technique
Think 'ONE fix for ONE known problem': the 15% history IS the fix. Don't fix it twice.
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