How do you add overhead and margin to a landscape tender?

What is the difference between overhead, margin and contingency?

Overhead is the cost of running your business that is not caused by any one job: office rent, estimating and admin wages, accounting, software, vehicles not charged to a site, standing insurances and the like. You pay it whether you win this tender or not, so every job has to carry a share of it.

Margin is profit: the amount left after every cost, including overhead, has been paid. It is the return for the risk of running the business, and it is a commercial decision rather than a calculation.

Contingency is an allowance for identified risk in this particular scope, such as unclear documents, unknown ground conditions or a tight programme. It is a cost you expect may be spent, not profit you hope to keep.

These three are often lumped into one percentage on the last line of the estimate. Separating them is what lets you see whether a cheap price is cutting profit or quietly failing to pay the rent. Our guide to pricing a commercial landscape tender shows where this step falls in the whole process.

What is the difference between markup and margin?

Markup is profit expressed as a percentage of cost. Margin is profit expressed as a percentage of the selling price. The same dollar profit gives two different percentages depending on which you use, and mixing them up is one of the most common ways a landscape tender ends up thinner than intended.

The example below uses made-up example figures only, not a recommended margin.

1. Start with total cost. Made-up example figure: the job costs $100,000 including overhead recovery and contingency.
2. Apply a 20% markup. Made-up example figure: $100,000 x 0.20 = $20,000 profit, giving a price of $120,000.
3. Work out the margin on that price. $20,000 divided by $120,000 is about 16.7%, not 20%.
4. Price for a 20% margin instead. Divide cost by one minus the margin: $100,000 / (1 - 0.20) = $125,000.
5. Check it. $25,000 profit divided by $125,000 is 20%. The same 20% target produced $5,000 more profit when treated as a margin.

The rule is simple. To convert a target margin into a price, divide cost by one minus the margin. To apply a markup, multiply cost by one plus the markup. Decide which one your business means when it talks about a percentage, and make your estimating template say so on the sheet.

How do you work out your overhead recovery rate?

An overhead recovery rate is the percentage you add to the direct cost of each job so that, across a year, your work pays for the business. You work it out from your own accounts, not from a figure someone else uses, because no two businesses carry the same overhead.

1. List a year of overhead. Pull every cost from your profit and loss that is not charged to a specific job. Your bookkeeper or accountant can help separate them.
2. Remove anything already priced in jobs. If site supervisors, utes or plant are charged to jobs through preliminaries or rates, take them out of overhead.
3. Estimate a year of direct cost. Use the direct cost of work you realistically expect to deliver, based on your recent years and current workload, not your best year.
4. Divide overhead by direct cost. Made-up example figure: $200,000 of overhead divided by $1,000,000 of direct cost is a 20% recovery rate on cost.
5. Review it at least yearly. Compare what you planned to recover with what you actually recovered, and adjust when overhead or turnover changes.

The rate is only as good as the turnover assumption behind it. If work drops, the same overhead is spread over less cost and the rate has to rise, so be honest about volume rather than optimistic.

Apply the rate to direct cost consistently, the same way every time. If you calculated it as a percentage of direct cost, apply it to direct cost, not to the selling price.

Where do overhead and margin sit in the BOQ?

Overhead and margin sit either spread through the rates in the bill of quantities or as separate lines on the tender summary, depending on what the tender documents ask for. Read the pricing schedule before you decide, because many head contractors set the format.

Where the schedule has its own lines for overhead and profit, fill them in and keep your measured rates at cost plus any allowances the schedule expects. Where it asks for all-inclusive rates, spread overhead and margin across the rates and say so in your clarifications.

Either way, keep the build-up visible in your own estimate: measured work, preliminaries, overhead recovery, contingency and margin as separate subtotals. A bill of quantities built this way is also what you will price variations against later, so check the contract for how overhead and margin on variations are to be calculated.

How do you adjust margin for risk on each job?

Margin should be adjusted job by job, while overhead recovery stays fairly constant. Overhead is a fact about your business; margin and contingency are judgements about this tender.

Price known risk as contingency first, then set margin. Things that should push you to look harder at both include:

• incomplete or conflicting drawings and specifications
• onerous contract terms, such as long defects liability periods or high retention
• a head contractor you have not worked with, or one with a slow payment history
• a long maintenance or establishment period carrying plant replacement risk
• a tight or staged programme with repeated mobilisations
• a crowded field of tenderers, or a job you do not particularly need

If the risk is too high for any margin to cover, that is a bid decision, not a pricing one. Our guide on whether a landscape tender is worth bidding covers that call, and tender clarifications and exclusions are often a better tool for an unclear scope than a bigger number.

What are the common mistakes?

The common mistakes with overhead and margin are double counting, applying margin in the wrong place, and confusing markup with margin. Each one either prices you out or quietly removes profit.

• Double counting preliminaries. Supervision, vehicles or site amenities priced in prelims and also left in your overhead figure. Each cost belongs in one place only.
• Margin on PC items and provisional sums without reading the contract. The contract usually says how these are adjusted and where your margin or attendance goes. Margin buried inside the sum can vanish when it is adjusted to actual cost.
• Confusing markup and margin. Applying a target margin as a markup leaves you short, as the worked example shows.
• Treating contingency as profit. Cutting contingency to win the job, then calling the result margin.
• A stale overhead rate. Using a rate calculated years ago when rent, wages or turnover have since changed.
• One blended percentage. A single figure for overhead, risk and profit hides which one you are cutting when you sharpen the price.

Summary table

The table below sets out what each layer above direct cost is, where its figure comes from and how it changes between jobs.

Frequently asked questions

What is the difference between overhead and margin?

Overhead is a cost: the money it takes to run your business whether or not this job goes ahead. Margin is profit: what is left after every cost, including overhead, has been paid. Overhead is recovered from your books; margin is a commercial decision you make per job.

What is the difference between markup and margin?

Markup is profit as a percentage of cost. Margin is profit as a percentage of the selling price. The same dollar profit is always a smaller percentage as margin than as markup, so applying a target margin as a markup leaves you short of the profit you planned.

How do you work out your overhead recovery rate?

Add up a year of overhead costs from your accounts, then divide by the direct cost of the work you expect to deliver over the same year. The result is the percentage of direct cost each job must carry. Check it against your actual results every year.

Are preliminaries part of overhead?

No. Preliminaries are costs caused by this particular site and programme, such as supervision, fencing and plant on this job. Overhead is the cost of running the business across all jobs. Price each once: putting a cost in both is double counting.

Should you add margin to PC items and provisional sums?

Read the contract first. It usually sets out how PC items and provisional sums are adjusted and where your margin or attendance on them should be shown. Burying margin inside the sum itself is risky, because it can disappear when the sum is adjusted to actual cost.

Should margin be the same on every landscape tender?

No. Margin should reflect the risk in the scope, the contract terms, the head contractor, the competition and how much you want the work. Overhead recovery stays fairly constant across jobs; margin and contingency are where you adjust for each tender.

Key takeaways

• Overhead is a cost, contingency is a risk allowance, margin is profit: price them as three separate lines.
• Markup is on cost, margin is on price; to hit a target margin, divide cost by one minus the margin.
• Work out overhead recovery from your own accounts and a realistic turnover, and review it yearly.
• Never put the same cost in both preliminaries and overhead.
• Follow the tender's pricing schedule for where overhead and margin appear, and keep the full build-up behind it.
• Check the contract before adding margin to PC items, provisional sums or variations.