A more or less arbitrary proportion of certain expenses which are or may be practically constant whatever the volume of business. For example, expense of main office and organization as distinguished from those pertaining and chargeable to a particular project.
The previously mentioned expenses for investigations which do not result in work.
Losses on other jobs.
Interest on capital invested or required to carry on the work.
Insurance and depreciation on idle or reserve equipment.
N. B. - The expense of investigating, estimating and securing a particular piece of work may be carried for a time under the name of the particular project; later, depending upon whether or not the work is secured, it may be called general expense of that project or transferred to overhead expense.
Various items suggested under the head of Contingencies may affect the percentage to be added as profit. Thus if payment is to be received in bonds they must naturally be discounted somewhere either in the specifications or in the bid or in both. If, say it be a provision of the contract that they shall be accepted at 90, and in the estimation of the contractor they be sold only at 87, then the difference of 3 per cent, must be considered in fixing the item of profit. Should there be further a possibility that the contractor could under certain circumstances realize only 85 for them, the chance of the 2 per cent, loss should be included in contingencies.
The identity and experience (if known) of other bidders for the same work, the amount of other prospective work, whether contractors generally are busy or not, general business conditions actual and prospective, the percentage which is to be preferred rather than the alternative of not securing the work, the bidder's reputation for experience, ability and resources for certainly and satisfactorily performing the work, as compared with the reputation of other bidders, are all items to be considered in fixing the percentage of profits. Such considerations may merge gradually into a class which should be included under other heads. Thus a strategical position in respect of location, amount, and immediate availability of plant, or a monopolistic position as in exclusive possession of certain appliances or processes.
It is a not uncommon belief that work done under a cost plus percentage basis is done for a smaller percentage of profit than is figured in work done under the system of unit prices. This comes from a confusion of the items of contingencies and profits, or an illogical assignment of the elements entering into each. Assume that under the cost plus percentage system 15 per cent, profit is a fair percentage, one that the contractor is willing to do business upon. Then if on adjacent work under unit price bid he adds 25 per cent, to his estimate of cost for no other reason than that it is under the different system, it is simply an index to his mental process in attempting vaguely to include under one item something that he thinks he may not have included under another.