ConstructionPro Week, Volume: 2 - Issue: 29 - 07/19/2013

Maintaining the Distinction Between Profit and Overhead Mark-Ups

By Bruce Jervis

 

A wrongfully terminated contractor is entitled to recover lost profit from the project owner. This is the profit the contractor reasonably anticipated had the contractor been allowed to perform the contract; it is a well-recognized element of damages for breach of contract. Lost overhead billings are generally not recoverable. The overhead would have been an indirect cost of performing the contract. The wrongfully terminated contractor did not perform that work or incur those costs.

 

It is important to maintain the distinction between profit and overhead mark-ups, but this is not always done. Contractors sometimes estimate and price work by applying a melded overhead and profit percentage to direct costs. Contractors sometimes apply mark-ups that are vaguely or inaccurately characterized. That was the case recently in California.

 

The contractor had estimated the fixed-price contract by applying a profit mark-up and a separate “project management” fee. In allowing the wrongfully terminated contractor to recover the project management mark-up, the court sometimes referred to it as profit and sometimes as overhead. It was unclear. The contractor was not allowed, however, to recover lost mark-ups on subcontracts and equipment purchases. Regardless of characterization, that would constitute double recovery.

 

Do you always maintain the distinction between profit and overhead mark-ups? Do you see mark-ups characterized in a manner that makes it impossible to distinguish? Would you challenge such a mark-up? I welcome your comments.

 

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