Mark It Up! Getting to a Realistic Bottom Line When Budgetary Estimating

Rory Woolsey is an Account Manager with The Gordian Group. He is a Certified Estimating Professional (CEP) through AACE International, and has worked in management and engineering for the construction industry for 33 years. Past positions held by Mr. Woolsey include field engineer, project manager, MIS manager, testing laboratory manager, and general contractor. Mr. Woolsey has given over 7,000 classroom hours of instruction to architects, engineers, contractors and facility managers on topics including project management, CPM scheduling, construction estimating, facility maintenance, partnering and leadership.

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

I get this question a lot 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. With this blog post I will answer the “markup” question for an average facilities project and try to 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: Bare direct costs are the core of all budgetary cost estimates. 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 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 need to be added. For this analysis we will assume that our starting bare cost will include all the subcontractors’ burdens and markups. The bare costs here will represent that which is “bare” to the general contractor. With general contractors subcontracting the bulk of their projects anymore, 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 contractors overhead and profit, or more likely, the subcontractor unit cost.

A Bare Cost in Context:  We now have a good definition of the bare direct cost which we will markup to arrive at a total project cost. The challenge is that there are a range of influences that an estimator should consider when choosing mark ups for a project. Some of these are:

• size of the project
• annual volume of the contractor
• competition
• public sector vs. private sector
• type of work
• risk(s)
• complexity of the work
• remodel vs. new construction
• availability of labor
• time of year

The phase of design that a project is in will also influence the markups used. A project at a conceptual design phase would suggest a different markup than one with its construction documents 90% complete. For this analysis, let’s assume an average repair/remodel project of an aging government facility.  Included are new interior finishes, a few code issue updates, some retrofit, and larger components of mechanical and electrical work. The project is in the cost range of under $500K and the design is somewhere between conceptual and the 50% point of design/development drawings. The market is competitive. This is our starting point for marking up the bare direct (subcontractor) costs. The stage is set, so let the mark-ups begin!

Estimate Contingency:  Capturing the scope of work is essential for accurately estimating (and bidding) facility renovation projects. For us budgetary estimators, an estimate contingency is a “catch all” to account for missing, poorly defined or hidden scope of work. Estimate contingency should not be an excuse for getting lazy. It is still necessary to diligently scope the project. The markup on bare costs for an estimate contingency varies through the design process. As a project becomes clearer in definition, then, theoretically, an estimate contingency should disappear. Contingency markups are as low as 2% and as high as 25%. Considering the average context that was assumed for this analysis, I am going to suggest an average contingency of 15%. This is not unusual at the early to mid-phase of design. For the simplicity of math, consider the bare direct cost to be 1. Then the contingency adjustment would be 1 x 1.15 = 1.15 x Bare Direct Project Cost. This will make sense when we pull all of the markups together.

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 heading of general requirements. At the later phases of design when these requirements are better defined, it is ideal to itemize and separately price out these things. At the earlier phases of design, a markup allowance is reasonable at 5% to 15% of the Total Project Cost (TPC). Large new construction projects would approach 5% of TPC and for smaller renovation projects 15% of TPC is reasonable. These figures are based on many years of building budgetary estimates. For this exercise, we will use a mid-range of 10% of the TPC to account for general requirements. This would equate to 10% x TPC in our final calculation.

Overhead: Overhead is the markup for the general contractor’s home office cost of operation. Typically, general contractors will calculate their annual home office expenses and their projected annual volume of work to arrive at a projected markup on each job bid during the year. If the year plays out as projected, the general contractor will recoup home office expenses. This markup will vary from contractor to contractor and can be under 5% for large volume contractors and greater than 10% of TPC for smaller contractors. For this exercise let’s use 10% of the TPC as a reasonable allowance for home office overhead. This would equate to 10% x TPC in our final calculation.

Profit: The general contractors profit markup will change from project to project and is usually stated as a function of the Total Project Cost. A low end profit markup might fall below 5% and high end over 15% of TPC for projects that have great risk. For this analysis let’s use 10%. This would equate to 10% x TPC in our final calculation.

Do the Math: For typical facilities repair/remodel type projects 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)  +
• the general requirements allowance (10% x TPC) +
• the general contractor’s home office overhead (10% x TPC) +
• the allowance for the general contractors profit (10% x TPC).

The math would look like this:

 Doing the math the TPC = 1.15 Bare Cost/ .70. Therefore TPC = 1.64 x Bare cost. This suggests a 64% markup on the direct bare costs is reasonable for budgetary estimating purposes on average facilities projects at early phase of design.  This 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 64% markup on direct bare costs is recommended for average facilities repair and remodel projects. Large new simple projects would theoretically require a lesser markup than the 64%. The total project cost for this type of project would roughly be a 30% markup on the direct bare costs:

 This equates to 1.10 Bare Cost/ .85 or 1.30 Bare Cost. A high end calculation would be:
 

This equates to: TPC = 1.20 Bare Cost/ .58 or 2.07 Bare Cost. This is equal to a 107% markup on the total bare cost. The markup range is 30% of bare costs on the on the low end and a 107% markup at the high end and an average markup of 55% on the direct bare cost totals. In summary, the range of markups on direct bare cost for budgetary cost estimating are:

• 30% (Low End)
• 55% (Average)
• 64% (Average)
• 107% (High End)