Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 All Rights.

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Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey All Rights Reserved Construction Accounting and Financial Management Chapter 10 Setting Profit Margins for Bidding

Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey All Rights Reserved Profit Equation Revenues = Construction Costs + Overhead + Profit Profit = Revenues – Construction Costs – Overhead

Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey All Rights Reserved Contribution Margin Contribution Margin = Revenues – Construction Costs – Variable Overhead CM Ratio = Contribution Margin/Revenues Contribution Margin = CM Ratio(Revenues) Profit = CM Ratio(Revenues) – Fixed Overhead

Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey All Rights Reserved Break-even Volume of Work Without profit  Revenues = Fixed Overhead CM Ratio At fixed level of profit  Revenues = Profit + Fixed Overhead CM Ratio

Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey All Rights Reserved Break-even Volume of Work

Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey All Rights Reserved Break-even Contribution Margin Ratio Without profit  CM Ratio = Fixed Overhead Revenues At fixed level of profit  CM Ratio = Profit + Fixed Overhead Revenues

Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey All Rights Reserved Break-even Contribution Margin Ratio

Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey All Rights Reserved Adjusting the Financial Mix Change prices Reduce construction costs Reduce general overhead

Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey All Rights Reserved Profit and Overhead Markup P&O Markup = Gross Profit Margin (1 – Gross Profit Margin)

Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey All Rights Reserved Tracking Competitors Determine what their profit and overhead markup would be based upon your construction costs P&O Markup = Bid/Construction Costs – 1 Use competitor’s historical P&O markups to aid in setting your profit and overhead markup