Calculate Indirect Cost Allocation Factor The calculation of this home office overhead allocation factor is based on:

1. The general and administrative (G&A) (home office) expenses incurred in the past year
2. The estimated sales (contract) volume for the coming year, and
3. The estimated gross margin (i.e., markup) for the coming year. This procedure is illustrated in the following example.

Step 1: Estimate of Annual Overhead (G&A Expense) Last year's G&A $270,000 10% Inflation 27,000 Firm growth 23,000 Estimated G&A $320,000

Step 2: Estimate of $ of Cost Basis for Allocation Estimated volume $4,000,000 Gross margin 20% = $800,000 Labor and material $3,200,000

Step 3: Calculate Overhead Percent Overhead Estimate = $ 320,000 = 10% Labor and Materials $ 3,200000

Step 4: Cost to Apply to a Specific Project Estimated labor and material costs $500,000 Overhead to apply (@ 10%) 50,000 Total $550,000

Breakeven Analysis Variable Costs: Costs that vary as a function of the volume of work, including the direct costs for labor, machines, and materials, as well as the indirect jobsite overhead costs. Fixed Costs: Costs that are generally constant over a given range of sales/construction volume.

(Source: Figure 6.10, Halpin & Senior, p. 152)

Breakeven Point: The point at which billed volume is just enough to cover the fixed and variable cost incurred.

(Source: Figure 6.11, Halpin & Senior, p. 153)

The BV can be found as follows:

BV = FC + VC

If variable costs (VC) are X percent of the billed dollar (BV), then: VC = (X/100)(BV)

Replacing VC in (1), BV = FC + X/100)(BV) or BV (X/100)(BV) -= FC

Solving for BV, we obtain: BV = (FC)/(1 (X/100))

1. What is the break even point for the above example?
2. What is the effect of lowering the fixed overhead amount?
3. What is the effect of reducing the variable cost percentage?

Profit % of billed amount to cover fixed overhead (G&A expenses) % of billed * i.e., charges amount to cover by subcontractors, variable costs by vendors for associated with materials, payroll project and equipment charges Dollar amount billed 3 x 106 Profit area Total cost, dollars 2 x 106 Breakeven point Total cost curve Variable cost Loss area 1 x 106 400,000 Billing curve Fixed overhead 1 x 106 3 x 106 2 x 106 Dollars billed