Margin comprises three components: indirect costs, company-wide costs, and profit.

Determining Indirect, or Distributable, Costs
The techniques used to calculate indirect costs (often called indirects) resemble those used to calculate direct costs .

Parametric Technique. The indirects calculated by this technique may be expressed in many ways, for example, as a percentage of the direct cost of a project, as a percentage of the labor cost, or as a function of the distance to the site and the volume of the construction materials that must be moved there. For a warehouse, for instance, the cost of indirects is often taken to be either one-third the labor cost or 15% of the total cost.

Unit-Price Technique. To determine indirects by the unit-price technique, the estimator proceeds as follows: The various project activities not associated with a specific physical item are determined. Examples of such activities are project management, payroll, cleanup, waste disposal, and provision of temporary structures.

These activities are quantified in various ways: monthly rate, linear feet, cubic yards, and the like. For each of the activities, the estimator multiplies the unit price by the unit quantity to obtain activity cost. The total cost of indirects is the sum of the products.

Crew Development Technique. To determine the cost of the indirects by this technique, the estimator proceeds as follows: The various project activities not associated\ with a specific physical item are determined. Next, the estimator identifies the specific personnel needed (project manager, project engineer, payroll clerks) to perform these activities and determines their starting and ending dates and salaries.

Then, the estimator computes total personnel costs. After that, the estimator identifies the specific facilities and services needed, the length of time they are required, and the cost of each and calculates the total cost of these facilities and services. The total cost of indirects is the sum of all the preceding costs.

Determining Company-Wide Costs and Profit
Company-wide costs and profit, sometimes called gross margin, are usually lumped together for calculation purposes. Gross margin is generally a function of market conditions. Specifically, it depends on locale, state of the industry and economy, and type of discipline involved, such as mechanical, electrical, or structural.

To calculate gross margin, the estimator normally consults standard handbooks that give gross margin as a percent of project cost for various geographic areas and industries. The estimator also obtains from periodicals the market price for specific work.

Then, the information obtained from the various sources is combined. As an example, consider the case of a general contractor preparing a bid for a project in a geographic region where the company has not had recent experience.

At the time that the estimate is prepared, the contractor knows the direct and indirect costs but not the gross margin. To estimate this item, the estimator selects from handbooks published annually the gross margin, percent of total cost, for projects of the type to be constructed and for the region in which the building site is located.

Then, the estimator computes the dollar amount of the gross margin by multiplying the selected percentage by the previously calculated project cost and adds the product to that cost to obtain the total price for the project.

To validate this result, the estimator examines reports of recent bids for similar projects and compares appropriate bids with the price obtained from the use of handbooks. Then, the estimator adjusts the gross margin accordingly.

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