MHIC NASCLA Contractors Practice Exam

How is project overhead percentage determined?

1. Add all project costs and divide by annual revenue

2. Calculate the total expenses and apply a fixed rate

3. Estimate based on industry standards

4. Add labor costs and materials together

The correct answer is: Add all project costs and divide by annual revenue

Determining the project overhead percentage involves analyzing expenses directly related to running a project versus the overall revenue generated by that project. By adding all project costs—including direct costs (like labor and materials) and indirect costs (such as administrative and operational expenses)—and dividing that sum by the annual revenue, you derive a percentage that reflects the overhead in relation to the financial performance of the project. This method provides a comprehensive view by capturing all costs associated with the project as a percentage of its revenue, allowing contractors to assess their profitability and make informed decisions regarding pricing, budgeting, and cost management. The approach emphasizes the importance of understanding both income and expenditures when evaluating project efficiency and overall financial health. The other options do not provide a complete or accurate method for determining overhead. While fixed rates or industry standards can inform estimates, they do not account for the unique financial circumstances of each project. Similarly, merely adding labor and materials without encompassing all costs ignores significant elements of overhead that can affect overall profitability.