Trade Exam · Module 2
Cost Estimating
A bid is built from direct costs (materials, labor at the loaded rate, equipment, permits and subcontractors), plus overhead, plus profit. This lesson shows how each piece is figured, why markup and margin are different numbers, how to convert one to the other, and how California's home improvement down payment rule limits what you can collect up front. Every percentage used for overhead, burden and profit is an example number for practice math, not an industry standard.
Key Takeaways
- CSLB lists "cost estimation for materials, equipment, labor, and overhead" under Planning and Estimating, about 22% of the C-36 trade exam.
- Bid = direct costs + overhead + profit. Direct costs = materials + labor + equipment + permits and fees + subcontractors.
- Price labor at the loaded rate: base wage plus the employer's payroll taxes, workers' compensation insurance and benefits. California requires workers' compensation coverage for employees (Labor Code 3700).
- Markup is a percentage of cost; margin is a percentage of the selling price. A 20% markup gives a 16.7% margin, and a 25% margin needs a 33.3% markup.
- To hit a target margin: markup = margin / (1 - margin). Selling price = cost / (1 - margin).
- Overhead, burden and profit percentages come from your own books. The ones in this lesson are example numbers for practice.
- On a home improvement contract the down payment may not exceed $1,000 or 10% of the contract price, whichever is less (B&P 7159.5).
Why This Matters
CSLB's C-36 study guide lists "cost estimation for materials, equipment, labor, and overhead" as a subject in Planning and Estimating, which is about 22 percent of the trade exam. Estimate questions are arithmetic: you are given costs and percentages and asked for a bid, a markup, a margin or a loaded rate. On the job the same arithmetic decides whether you make money.
The Parts of a Bid
Direct Costs
Direct costs are the costs you can tie to one job.
- Materials: everything that gets installed, from your takeoff, including any waste allowance, trim, supports, insulation and firestopping.
- Labor: hours multiplied by the loaded labor rate (see below).
- Equipment and consumables: rentals such as lifts, trenchers or jetters, plus consumables that are used up but not installed, such as solder, flux, cutting blades and test plugs.
- Permits and fees: plan review, permit and inspection fees for the job.
- Subcontractors: any part of the work you hire out, such as concrete cutting, excavation or insulation.
Overhead
Overhead is the cost of running the business that cannot be charged to one job: office rent, office staff, insurance, vehicles, phones, software, accounting and licensing. It is real money that has to be recovered through your prices. A bid that leaves out overhead can look profitable on paper and still lose money.
There is no correct overhead percentage for everyone. Figure yours from your own books. One simple method is to divide your annual overhead by the billable hours or the direct costs you expect in a year.
Profit
Profit is what is left after every direct cost and all overhead are paid. It is your return for the risk you take on the job. Like overhead, the percentage is your business decision.
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