Understanding Company Overhead & Margin

BACKGROUND

In the fast-paced construction industry, it can be easy to lose track of how much is actually being spent on a job. Sometimes, companies may not even know the exact cost of a job until after it has been completed—which may result in a huge loss of yearly revenue. To help keep your bottom line on target, each ConstructionOnline™ OnCost™ Estimate provides a detailed breakdown of Company Overhead and Margin that can be used to calculate overhead costs and profit margin for every job entered in ConstructionOnline. Company Overhead and Margin allows you to use numbers from your entire estimate and see the bigger picture when it comes to profit. 

COMPANY OVERHEAD & MARGIN

In ConstructionOnline, Company Overhead and Margin is reserved for company overhead, company margin, contingency fees, and any additional costs necessary to help keep jobs on track for profit. While Company Overhead and Margin may be seen in ConstructionOnline as one total value (e.g., on the Project Totals sheet of an Estimate), this total comes from the summation of each individual line within the Company Overhead and Margin sheet of your Estimate. Each component of Company Overhead and Margin is represented by an individual line on the sheet. These components include:

• Company Overhead: the cost of additional business expenses not directly used for a job or service. Example overhead costs include rent, labor, insurance, utilities, taxes, and more.  
• Company Margin: represents the desired profit margin by your company. 
• Contingency: reserved for additional expenses that may act as a cushion for any overages. 
• Other 1 & 2: can be used for additional costs or fees that may need a different markup value or calculation method than company overhead.  

Each component of Company Overhead and Margin is completely customizable and can be renamed to best fit your Estimate's needs. While many companies may choose to keep Company Overhead and Company Margin broken out as two separate amounts, ConstructionOnline's flexible Estimating toolkit supports the setup of Company Overhead and Margin for all kinds of jobs, from cost-plus to fixed price contracts. Try using one of the components to act as extra insulation for any variances throughout the job or individually factor in the cost of your ConstructionOnline subscription—the sky's the limit!

MARKUP & MARKUP TYPE

Now, let's break down the contents of each component. Each component of Company Overhead and Margin can be assigned its own value and calculation method—known in ConstructionOnline as markup and markup type. These factors are used to calculated the total for the component, which ConstructionOnline will display in the Estimate as markup total. Each component of Company Overhead and Margin is calculated using the sum of the base Estimate and the total allowances for ALL selections. Please note that the base Estimate is the total base cost, markup, and tax for ALL individual Estimate Items. 

In Company Overhead and Margin, markup represents the exact dollar amount or percentage that is used to calculate each component. Markup type is used to determine how the value of each component is calculated. ConstructionOnline provides three different markup types that can be used to calculate each component of Company Overhead and Margin - 

1. Percent of Costs: this simple method calculates the component as a percentage of your Estimate Subtotal. Commonly used for Cost Plus projects, Percent of Costs adds a management or service charge directly on top of project costs. 
   

   
   Percent of Costs = Estimate Subtotal × Markup

   For example, let's say your Estimate Subtotal is $10,000,000. You decide to calculate Company Margin using a 20% markup and the Percent of Costs method. Your resulting Company Margin would be $2,000,000. Note that while the markup entered is 20%, the resulting amount is 20% of the Estimate Subtotal—not 20% of the final Project Total.  
   
   
2. Percent Margin: this method calculates a true margin on your Estimate. Percent Margin is a proportional calculation which guarantees the component will always equal the exact percentage of your Project Total. This means it will also figure in the values of other Company Overhead and Margin (COM) components during calculation—including any components also calculated using the Percent Margin method. 
   
   ConstructionOnline calculates Percent Margin in two steps -
   
   Step 1. Calculate the Project Total

   
   Estimate Subtotal ÷ (1 – Sum of All Percent Margin%) = Project Total
   

   Step 2. Calculate Each Individual Percent Margin Amount

   Project Total × Individual Percent Margin % = Amount

   For example, let's say your Estimate Subtotal is $10,000,000. However, you also have a Company Overhead of $2,000,000 and a Contingency of $10,000. This results in an Estimate subtotal of $12,010,000. You decide to calculate Company Margin using a 20% markup and the Percent Margin method. The value for your Estimate subtotal is used during calculation, resulting in a Company Margin of $3,002,500.
   
   If additional components are also calculated using the Percent Margin method, ConstructionOnline will automatically adjust the values of any existing components calculated using Percent Margin. This occurs because the Estimate subtotal has changed and Percent Margin is always calculated using the current value of the Estimate subtotal. 

3. Fixed Amount: represents a fixed dollar amount that is not derived from any value in your Estimate. 

Worked Example

The advantage of Percent Margin becomes especially clear with a worked example. Consider the following estimate - 

• Estimate Subtotal: $100.00
• Company Overhead: 8% 
• Company's Profit Margin: 7% 

Using Percent of Costs: 

1. Calculate the Company Overhead Amount
   
   1. $100.00 × 8% = $8.00
2. Calculate the Company's Profit Margin Amount 
   1. $100.00 × 7% = $7.00
3. Calculate the Project Total 
   
   1. $100.00 + $8.00 + $7.00 = $115.00
      
      

Using Percent Margin:

1. Calculate the Project Total 
   1. $100.00 ÷ (1 – (8% + 7%)) = $100.00 ÷ (1 – 0.15) = $100.00 ÷ 0.85 = $117.65 
2. Calculate the Company Overhead Amount
   1. $117.65 × 8% = $9.41
3. Calculate the Company's Profit Margin
   1. $117.65 × 7% = $8.24

Using the same percentages, Percent of Costs produces a Project Total of $115.00, while Percent Margin produces a Project Total of $117.65—and guarantees that each amount equals the exact percentage of the Project Total as entered. This is the core advantage of Percent Margin: guaranteed precision on every job. 

Which Method Should I Use? 

The right choice depends on your project type and pricing goals - 

• Use Percent of Costs when working on Cost Plus projects, or when a simple percentage markup on the project subtotal meets your needs. 
• Use Percent Margin when you need to guarantee that a specific percentage of the final Project Total is always allocated to overhead or profit, regardless of how the rest of the estimate is structured. 
• Use Fixed Amount when a component has a set cost that should not fluctuate with the estimate. 

Ready to add company overhead or margin to your Estimate? Step-by-step instructions can be found in Set Company Overhead and Margin in Estimate.

HAVE MORE QUESTIONS?

• Frequently asked questions (FAQ) regarding OnCost Estimating can be found in the FAQ: Estimating article. 
• If you need additional assistance, chat with a Specialist by clicking the orange Chat icon located in the bottom left corner or visit the UDA support page for additional options.