KORThe cost of the work is measured, counted and checked. Then, at the bottom of the estimate, three percentage lines decide whether the project makes the company money: overhead, profit, contingency. Too often those percentages get copied from one bid to the next and nobody knows where they came from. Here's how to calculate them, the order to apply them in, and a complete example down to taxes.
General conditions vs. overhead
The two are often confused. They don't cover the same costs, and they aren't calculated the same way.
- General conditions: the costs of this job, which go away when it's finished: superintendent, site toilet, fencing, dumpsters, permits. You price them line by line, with quantities (hours, months, pickups). They're part of the project cost. See our guide to general conditions.
- Overhead: the costs of the office, which exist with or without this project: rent, office salaries, accounting, company vehicles, annual insurance, software. They're spread over projects as a percentage.
The same cost never goes in both places. If the project manager is counted in hours in general conditions, that share of their salary shouldn't also be in your annual overhead.
Working out your overhead percentage
The percentage comes from your own numbers for the year, not a market average.
- Add up your annual overhead (budgeted for the coming year, or actual for last year).
- Estimate the year's cost of work: the sum of your projects' subtotals (work + general conditions), without overhead, profit or taxes.
- Divide: overhead ÷ cost of work.
| Annual overhead | Amount |
|---|---|
| Office and warehouse rent | $36,000 |
| Office salaries (admin, estimating) | $96,000 |
| Company vehicles | $18,000 |
| Annual company insurance | $12,000 |
| Accounting and software | $18,000 |
| Total | $180,000 |
Expected cost of work for the year: $2,400,000.
Overhead percentage: 180,000 ÷ 2,400,000 = 7.5%.
Two traps
- Use the same base to calculate and to apply. If you divide by revenue (sales, including profit) but apply the percentage to the cost of work, you recover less than planned. Example: 180,000 ÷ $2,800,000 revenue = 6.43%. Applied to $2,400,000 of cost: 6.43% × 2,400,000 = $154,320. You're $25,680 short of paying for the office.
- Volume matters. If the year slows to $1,800,000 of work, the same $180,000 of overhead is 180,000 ÷ 1,800,000 = 10%. Redo the calculation when your volume changes, and check at year end what your projects actually recovered.
Profit
Profit is what the company keeps once every cost is paid, the office included. It isn't a reserve for surprises: it's the return on the risk taken and the capital invested. The percentage is a business decision that depends on the market, the competition on this job and the risk. There's no single "right" number for everyone.
Watch the difference between markup and margin. An 8% profit on cost isn't 8% of the selling price: in the example below, $32,000 of profit on a $474,000 price before taxes is 6.75% of the price. Keep that in mind if you compare with your financial statements, which show margin on sales.
Contingency
Contingency covers what the documents don't show yet: incomplete drawings, unknown existing conditions in a renovation, soil still to confirm. It should be justified project by project:
- Little or no contingency for a new house with complete drawings and firm quotes.
- More contingency for a renovation with walls nobody has opened, or when part of the pricing isn't confirmed yet.
Contingency isn't a second profit line. If a risk is known and can be priced (say, possible rock blasting), a separate, named line is better than a bigger blanket percentage.
The order to apply them in
The easiest method to check: each percentage is calculated on the same subtotal, then the amounts are added. That's what KOR does.
Another common method applies them compounded: profit on cost plus overhead, then contingency on the whole. Both are defensible; what matters is always using the same one, so your percentages mean the same thing from job to job.
Worked example, down to taxes
Project subtotal (work + general conditions): $400,000. Overhead 7.5% (calculated above), profit 8%, contingency 3%.
| Line | Calculation | Amount |
|---|---|---|
| Subtotal | $400,000.00 | |
| Overhead 7.5% | 400,000 × 0.075 | $30,000.00 |
| Profit 8% | 400,000 × 0.08 | $32,000.00 |
| Contingency 3% | 400,000 × 0.03 | $12,000.00 |
| Amount before taxes | 400,000 + 30,000 + 32,000 + 12,000 | $474,000.00 |
| GST 5% | 474,000 × 0.05 | $23,700.00 |
| QST 9.975% | 474,000 × 0.09975 | $47,281.50 |
| Total | 474,000 + 23,700 + 47,281.50 | $544,981.50 |
The three adjustments add up to $74,000, or 18.5% of the subtotal. GST and QST are each calculated on the amount before taxes: QST doesn't apply on top of GST.
The same thing, compounded
| Line | Calculation | Amount |
|---|---|---|
| Overhead 7.5% | 400,000 × 0.075 | $30,000.00 |
| Profit 8% | (400,000 + 30,000) × 0.08 | $34,400.00 |
| Contingency 3% | (430,000 + 34,400) × 0.03 | $13,932.00 |
| Amount before taxes | $478,332.00 |
With the same percentages, compounding gives $4,332 more before taxes. That's not a mistake, just a different definition of the percentages. Pick yours and stick with it.
Common mistakes
- An inherited overhead percentage from an old bid, never recalculated with this year's numbers.
- Counting twice: project manager or insurance in both general conditions and overhead.
- Replacing general conditions with a percentage. They depend on job duration, not on the cost of the work.
- Calculating QST on the amount including GST.
- Confusing markup with margin when comparing a bid to your financial statements.
In KOR
In KOR's estimate, overhead, profit and contingency are percentage adjustment lines, each calculated on the same subtotal and rounded to the cent; they start at 0% and you enter your own rates. General conditions are a separate section, always at the top of the estimate, priced line by line. Taxes are then each calculated on the amount before taxes (GST and QST in Québec, by province elsewhere in Canada). In the client version of the Excel and PDF exports, the adjustments are spread over each trade or section, in proportion, without showing your percentages.
Summary
- General conditions = job costs, line by line; overhead = office costs, as a percentage.
- Overhead percentage = annual overhead ÷ the year's cost of work, on the same base you apply it to.
- Redo the calculation when your volume changes.
- Profit = a business decision; contingency = this project's own risk.
- One method of applying them, always the same; taxes last, each on the amount before taxes.