CSLB C-33 Painting & DecoratingPlanning and EstimatingMedium
A painting contractor is calculating overhead costs for the upcoming year to ensure accurate bidding. The contractor projects total direct project costs (materials, labor, equipment, subcontractors) of $1,000,000 for the year. Annual fixed overhead expenses (office rent, administrative salaries, insurance, utilities) are estimated at $150,000, and variable overhead expenses (marketing, vehicle maintenance, small tools) are estimated at $50,000. If the contractor aims for a 15% net profit margin on total project revenue, what is the total overhead percentage that needs to be applied to direct project costs to cover overhead?
- A20%
- B15%
- C35%
- D30%
Show answer & explanationAnswer & explanation
Correct answer: A. 20%
Total overhead costs are fixed overhead ($150,000) + variable overhead ($50,000) = $200,000. To find the overhead percentage relative to direct project costs, divide total overhead by total direct project costs: $200,000 / $1,000,000 = 0.20 or 20%. The net profit margin is a separate calculation applied to the total project revenue, not direct cost to cover overhead.
Why the other options are wrong
- B. This represents the desired net profit margin, not the overhead percentage.
- C. This is an overestimation, possibly including the profit margin incorrectly in the overhead calculation.
- D. This would be the overhead percentage if total overhead was $300,000.
Overhead Percentage
A ratio, typically expressed as a percentage, that represents a company's total overhead expenses relative to its direct project costs or total revenue, used for accurate pricing.
- Calculated by dividing total overhead by a base (direct costs or revenue).
- Used to allocate general business expenses to individual projects.
- Crucial for ensuring bids cover all costs and contribute to profitability.
Memory trick: Divide Dollars Direct: Overhead's Our Objective.