United States
Hong KongOverhead and break-even
Overhead is the cost of running the business that cannot be charged to any single job. Break-even is the revenue at which contribution covers fixed cost, and every job must carry a share of overhead to reach it.
The reason profitable-looking jobs can add up to an unprofitable year.
What overhead is
Everything the business costs that you cannot charge to one job. The office, the estimator, the accountant, general insurance, the truck that visits every site, licensing fees.
It is incurred whether or not you win work, which is what makes it dangerous.
Why it has to be recovered per job
Because there is nowhere else for it to come from. If your markup covers direct cost and profit but not overhead, every job contributes to a loss.
A firm winning plenty of work at a markup that does not carry overhead loses more money the busier it gets. Volume accelerates the problem rather than solving it, and that is counterintuitive enough to make a good exam question.
Break-even
The revenue at which contribution equals fixed cost. Below it the year loses money regardless of how any individual job looked.
Contribution is revenue less variable cost. Fixed cost is overhead. Divide one by the other and you have the volume you must do to stand still.
The ratios
| Ratio | Formula | Tells you |
|---|---|---|
| Current ratio | Current assets over current liabilities | Whether you can pay near-term bills |
| Working capital | Current assets less current liabilities | The cushion in absolute terms |
| Break-even | Fixed cost over contribution margin | The revenue needed to cover overhead |
Sureties and licensing boards both look at these. A state may require a minimum net worth or working capital as a licensing condition.
Why the exam cares
Because a contractor who cannot read their own financial position is a risk to owners and subcontractors. The business material on this paper is there for the same reason bonding exists. It has to be recovered. Busier makes it worse. Volume will not fix it.
Common questions
What is overhead?
The cost of running the business that cannot be charged to any single job, such as the office, estimator and general insurance.
How is overhead recovered?
Through the markup on every job. If the markup does not carry it, every job contributes to a loss.
What is break-even?
The revenue at which contribution equals fixed cost, calculated as fixed cost divided by contribution margin.
What is the current ratio?
Current assets divided by current liabilities, showing whether near-term bills can be paid.
Why does the exam test financial ratios?
Because a contractor who cannot read their own position is a risk to owners and subcontractors, which is also why bonding exists.