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Mark It Up!

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By Rory Woolsey, CPE

“What are the ‘appropriate’ markups for overhead, profit and contingency when budgeting facilities construction projects?”

I get this question a lot frequently from my architect friends when helping them budget their projects through the design process. The answer can get messy, considering all the factors that can impact the bottom line. There are many variables to consider. I will answer the “markup” question for an average facilities project and try and keep it simple, but still useful. Pay close attention to the math, and follow the logic, and in the end we will arrive at a useful range of markups that can be used for facilities budgetary estimating. Enjoy!

Starting with a Bare Cost
At the core of all budgetary estimates are  BAREBARE direct costs. These are the sticks, bricks, labor and equipment that are necessary to build the project. Bare costs can get murky if you wade too deeply into the details.

Just the bare labor component includes adders add-ons such as fringe benefits, unemployment insurances (federal and state), social security taxes, public liability costs, and builders’ risk insurance. Beyond this, the installing contractor’s overhead(s) and profit will also need to be added.

In this analysis, we will assume that our starting bare costs will include all the subcontractors’ burdens and markups. The bare costs in this case will represent that which is “bare” to the general contractor. With general contractors subcontracting the bulk of their projects, this is a reasonable place to start the marking up. Note that for budgetary estimating, many unit price and assemblies cost data reference books start at this same “bare” point when making reference to “including overhead and profit.” This typically refers to the installing contractor’s overhead and profit or, more likely, the subcontractor unit cost.
  
Setting the Stage
  We now have a good definition of the BARE bare direct costs which we will mark up to arrive at a total project cost. This is a challenge, because as there are a range of influences that an estimator should consider when choosing mark ups for a project.
These include:
• The size of the project
• The annual volume of the contractor
• The competition date
• Public sector vs. private sector
• The type of work
• The type of risks
• The complexity of the work
• Remodel or new construction
• Availability of labor
• The time of year

Each phase of a project’s design a project is in will also influence the markups used. A project at a conceptual design phase would suggest a different markup than one that is 90% complete with construction documents. In setting the stage for this analysis, we will assume an average repair & and remodeling project of an aging government facility.

There are a few code issues to address, some re configuring of walls, new interior finishes, some tight retrofit, and, of course, many components of mechanical and electrical work. Our basic project will cost less than $500K, and the design is somewhere between conceptual and the mid pointmidpoint of design/development. The market is competitive. The bare cost is defined and the stage is set -- so let the marking up begin!

Estimate Contingency
Defining and capturing the scope of work is the key to accuracy in estimating (and bidding) projects (-- particularly with renovation projects). For us budgetary estimators, an estimate contingency is a “catch all” to account for missing, poorly defined, or even what might be a hidden scope of work. Estimate contingency should not be used as an excuse to skip the due diligence. It is still necessary to scope the project thoroughly.

The markup on bare costs for an estimate contingency varies through the design process. As a project becomes clearer in definition, theoretically, an estimate contingency should disappear. Contingency markups are as low as 2% and as high as 25%. With our average repair & and remodeling project in mind, I am going to suggest an average contingency of 15%. This is not unusual at the early- to mid-phase of design.

If our bare direct costs were to be a unit of 1, then a 15% contingency on the BARE bare costs would be 1 x 1.15 = 1.15 x Bare Direct Project Cost. This will make sense when we pull all the markups together into ONE one markup on BARE Bare Direct Project Cost.

General Requirements
A general contractor’s site management expenses for such necessities as a superintendent, project manager;, site trailers, schedule management, quality control, daily clean up, security, safety, site phones, record drawings and project commissioning all fall under the category of general requirements or project site overhead.

At the later phases of design, when these requirements are better defined, it is more accurate to itemize and unit price these. At the earlier phases of design, a markup allowance of 5% to 15% of the Total Project Cost (TPC) is within reasonproper. Large new construction projects would approach 5% of TPC; and for smaller renovation projects, 15% of TPC is reasonable. For this analysis, we will use a mid-range of 10% x TPC as an allowance markup for general requirements.

Overhead
Overhead is the markup for the general contractor’s home office overhead. Typically, general contractors will calculate their annual home office expenses and set them up against theretheir projected annual volume of work to arrive at a projected markup to recoup office overhead. This markup will vary from contractor to contractor and can be under 5% of TPC for large-volume contractors and greater than 10% of TPC for smaller contractors. For this exercise, let’s use 8% of the TPC as a reasonable allowance for home office overhead.

Profit
The general contractor’s profit markup will change from project to project, and it is usually stated as a function of the Total Project(s) volume. A low- end profit markup might fall below 5% of TPC; and high end could be over 15% of TPC for projects with great aggravation difficulty and risk. For this analysis we will use 8% x TPC as an allowance for profit. The market is competitive.

Do the Math
For a typical facilities repair & and remodel type project under $500K, a reasonable markup on direct BARE cost totals can be calculated from the assumptions made thus far.

Let’s do the math. The Total Project Cost (TPC) would equate to the sum of direct bare costs marked up for contingency (1.15 x BARE Totals) plus the general requirements allowance (10% x TPC) plus the general contractor’s home office overhead (8% x TPC) plus the allowance for the general contractor’s profit (8% x TPC).

The math function would look like this; : TPC = 1.15 BARE Cost + 10%TPC + 8% TPC + 8% TPC.  Solving for TPC = 1.15 Bare Cost/ .74. Therefore, TPC = 1.55 x Bare cost. This suggests a 55% markup on the BARE direct costs would equal the TOTAL Project Cost estimate. This total would include an estimate contingency, general requirements, home office overhead and profit. This markup does not include sales taxes, bonds and AE fees.

Variation on the Theme
A 55% markup on direct BARE costs is reasonable for average facilities repair and remodel projects under $500K. Going through the same calculation for simple, new and larger projects, the overall markup on BARE costs would be less; : TPC = 1.10 Bare Cost + 5% TPC + 5% TPC + 5% TPC, which equates to roughly a 30% markup on BARE direct costs.

A high -end calculation for complex, smaller, remodel projects would be; : TPC = 1.15 Bare Cost + 15% TPC + 12% TPC + 15% TPC. This equates to roughly 100% markup on BARE costs.

Keep in mind that these markups are all being considered at the conceptual to mid pointmidpoint of design on a project. In summary, the range of markups on direct BARE costs to arrive at TOTAL project cost areis : 30%, 55%, and 100%.

Rory Woolsey, CPE, has worked in Management and Engineering for the construction industry for 33 years, starting as a construction laborer in Billings, Montana, in 1972.

He has since held positions as a field engineer, project manager, MIS manager, testing laboratory manager, estimator, senior editor, designer, structural engineer, and general contractor.  He is currently the President of The Wool-Zee Company, Inc., construction consultants. Rory is currently an Accounts Manager for the Gordian Group, the parent company to RS Means.

Mr. Woolsey has also held positions with some of the leaders in the construction industry, such as Bechtel, H.J. Kaiser Constructors, and the R.S. Means Company, and has worked on projects ranging from heavy, military, industrial, commercial and residential.

He has given over 7,000 classroom hours of instruction nationally to architects, engineers, contractors, and facility managers on topics of project management, CPM scheduling, construction estimating, facility maintenance, partnering, and leadership. Rory is a Certified Estimating Professional (CEP) through AACE International.

This article was taken from a post on his blog:
woolseyestimating.blogspot.com

Tags: Costs, Material costs



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