CSLB C-33 Painting & DecoratingPlanning and EstimatingHard
A painting contractor is preparing a bid for a project that includes an 'Allowance of $15,000 for custom finishes.' The contractor's standard overhead is 15% and profit is 10% on direct costs. How should the contractor incorporate this allowance into the bid?
- ASubtract $15,000 from the total direct costs before calculating overhead and profit.
- BAdd $15,000 plus 15% overhead and 10% profit on the allowance amount to the total bid.
- CAdd $15,000 directly to the total bid without applying overhead or profit.
- DInclude only the direct cost of the allowance, excluding overhead and profit, as it is a client-defined amount.
Show answer & explanationAnswer & explanation
Correct answer: B. Add $15,000 plus 15% overhead and 10% profit on the allowance amount to the total bid.
Allowances are typically treated as direct costs by the contractor. Therefore, both overhead and profit should be applied to the allowance amount, just as they would be for any other direct cost, to cover the contractor's management, administration, and profit on that portion of the work.
Why the other options are wrong
- A. Subtracting the allowance would incorrectly reduce the total bid and potential earnings.
- C. Omitting overhead and profit on allowances means the contractor loses money on managing that portion of the work.
- D. Even for client-defined allowances, contractors incur overhead (e.g., procurement, supervision) and expect profit for managing the associated work.
Allowance with O&P Calculation
An allowance is a specified amount within a contract for items not yet selected. Contractors typically apply their standard overhead and profit percentages to allowance amounts.
- Treat allowances as direct costs for O&P calculation.
- Covers contractor's management and profit for that scope.
- Ensures full cost recovery and profitability.
Memory trick: An allowance isn't a gift; it's a job, demanding O&P.