Buying Work: Overhead Recovery on a Thin-Margin Buildout

Step 1 - Convert annual overhead to a job-length figure. Overhead per week = $138,000 ÷ 52 = $2,653.85 Overhead over 14 weeks = $2,653.85 × 14 = ≈ $37,154

Step 2 - Build the break-even price. Break-even = direct cost + overhead share = $118,000 + $37,154 = ≈ $155,154

Step 3 - Test the $150,000 bid.

• Planned contribution = $150,000 − $118,000 = $32,000 (21.3% of price)
• Overhead that must be recovered = $37,154 (24.8% of price)
• Shortfall = $37,154 − $32,000 = $5,154 under water

Conclusion. At $150,000 the job does not carry its own weight on a full-absorption basis; it is roughly $5,200 short before any overrun. A 5% direct-cost overrun (about $5,900) turns the shortfall into an $11,000 loss. Note the distinction the exam expects: cash break-even is $118,000 (overhead is being paid whether or not this job runs), while full-absorption break-even is about $155,154. Quoting the correct break-even depends on which question you are answering.

The owner is describing contribution margin, which is only half of the decision. A positive contribution is better than an idle crew if and only if several conditions hold:

1. The overhead is genuinely unavoidable. If taking the job forces a second superintendent, overtime, or a larger insurance audit premium, those costs are incremental and belong in the direct cost column, not the overhead pool.
2. No displacement. If a $210,000 job would arrive in week six and the crew is already committed, the $150,000 job has an opportunity cost that exceeds its contribution.
3. No market-price damage. The client is a repeat customer. A deeply discounted number becomes the benchmark for the next negotiation.
4. Risk is priced. A 14-week interior buildout with an unknown existing-condition profile carries real overrun exposure; the $5,154 shortfall is smaller than one bad discovery.

Recommended position: bid no lower than about $156,000, or hold $150,000 and issue a written alternates list (defer a portion of the ceiling grid, substitute a specified millwork package, exclude after-hours work). If the owner insists on buying work, put the decision in writing with the contribution analysis attached so the trade-off is documented rather than assumed. Do not bid below $150,000 to 'stay busy' - that is paying the client for the privilege of working.

Size the exposure.

• Direct cost accrues at roughly $118,000 ÷ 14 = $8,429 per week.
• With monthly billing plus net 45, the first check lands near day 75. By then the company has incurred about $118,000 × (9 ÷ 14) ≈ $75,900 of cost and has collected nothing.
• Retainage of 10% on a $150,000 contract withholds $15,000 until final completion and punch sign-off - months after the last dollar of cost.

So the job is effectively financed by Riverbend's line of credit, and the retained $15,000 is an interest-free loan to the client. Two aggravating factors: retainage is typically calculated on every pay application including change orders, and a disputed punch item can hold the whole release.

Steps that reduce it:

• Bill monthly, in arrears, with the application submitted by a fixed date (e.g., the 25th) and a contractual payment date, not merely 'net 45.'
• Negotiate retainage down to 5% or provide for reduction to 5% once the job is 50% complete, and write the release trigger as 'final completion' rather than 'punch-list sign-off by owner.'
• Request a mobilization payment or materials deposit for the long-lead items.
• Submit lien waivers only in exchange for payment, and condition waivers on collected funds.
• If a payment goes 30 days past due, preserve mechanic's lien rights on the project rather than relying on leverage alone.