Arizona Contractors License Practice Exam

What percentage of a bid typically constitutes project overhead?

1. 1-3%

2. 5-10%

3. 10-15%

4. 15-20%

The correct answer is: 5-10%

The correct answer indicates that project overhead typically constitutes between 5-10% of a bid. This is an important aspect of project pricing as overhead is the indirect cost required to execute a project, which is not directly attributable to a specific task or activity. When preparing a bid, contractors must account for overhead costs such as office expenses, utilities, administrative salaries, and other operational costs that support project execution but do not directly relate to labor or materials. By including an appropriate percentage for overhead in the bid, contractors ensure they cover these necessary expenses while remaining financially viable throughout the project. The range of 5-10% is widely accepted in the construction industry because it reflects a balance between being competitive in proposals while ensuring coverage for essential indirect costs. If the percentage were lower than this range, contractors might struggle to cover their operational costs adequately, potentially leading to financial challenges. Conversely, if the percentage were much higher, bids might become uncompetitive, leading to lost contracts. Thus, understanding and calculating overhead accurately is a vital skill for contractors in preparing their bids.