Methodology
The arithmetic behind the rate
Short enough to check in a minute, which is the point: a rate you cannot check is a rate you cannot defend in a negotiation.
This model asserts nothing about what your work costs. There is no default labour rate, no assumed waste allowance and no assumed overhead percentage, because those are one company's costs rather than an industry's. Everything below operates on figures you supply. The two things it does claim are arithmetic, and both are set out in full.
Outputs
Every figure the calculator prints
In the order the model produces them. Nothing else is involved at any point.
| Figure | How it is calculated |
|---|---|
| Materials with waste | material × (1 + waste % ÷ 100) |
| Direct cost per unit | labour + materials with waste + plant + subcontract |
| Recovery per unit | direct cost × (site % + head office %) ÷ 100 |
| Full cost per unit | direct cost + recovery |
| Rate | full cost × (1 + p) when the profit is added to cost, full cost ÷ (1 − p) when it is taken out of the rate |
| Profit per unit | rate − full cost |
| Margin on the rate | profit ÷ rate |
| Markup on cost | profit ÷ full cost |
| Value of the line | rate × quantity |
| Margin after a 10% rise | the rate is held where it is and ten per cent of the labour, or of the materials with waste, is added to the full cost |
| Head office not recovered | head-office recovery per unit × (priced quantity − executed quantity) |
The whole model, in order
- direct = labour + material × (1 + waste) + plant + sub
- cost = direct × (1 + site + office)
- rate = cost × (1 + p) or cost ÷ (1 − p)
- profit = rate − cost
- margin = profit ÷ rate · markup = profit ÷ cost
Per-unit figures keep two decimal places and line totals are rounded to the whole unit. That is the one place this calculator differs from the others on the site: elsewhere a decimal place is noise on a contract value, but a rate is the number that goes into the tender, and a cubic metre priced at 312.40 against one priced at 312 is four hundred on a thousand-metre line. Every figure is rounded as it is produced rather than as it is printed, so the sums on screen add up exactly as shown.
The control that matters
A markup on cost and a margin on price are different numbers
Both are called the margin in conversation. They are never equal, and the one people quote is the larger.
Add twenty per cent to a cost of 100 and the rate is 120. The profit is 20, which is twenty per cent of the cost and 16.7 per cent of the rate. Take twenty per cent out of the rate instead and the rate is 125, the profit is 25, and only now is the margin actually twenty per cent. The gap between the two rates is four per cent of the tender, and on a line priced across a thousand units it is real money.
The error is not that one method is wrong. Both are legitimate and different firms use different ones. The error is pricing on one basis and reporting on the other, which happens quietly because the two share a name and a percentage sign. So the basis is a control on the form rather than an assumption in the code, and both percentages are printed on every run — the one you did not choose is a conversion of your own number, not a second opinion about it.
The margin basis is capped at 95 per cent and the markup at 200. A margin of 100 per cent of the rate divides by zero, and anything near it produces a rate so far from the cost that the page stops describing a real bid.
The identity
Your markup on cost is the overrun that takes the line to zero
Not approximately. Exactly, and for the same reason both are profit divided by cost.
Once the rate is in the contract it does not move. So the question that matters is not what the margin is but how far the cost can rise before the margin is gone — and that number is the markup on cost, unchanged. Price at ten per cent on cost and the line breaks even when the work comes in ten per cent over. Price at twenty-five and you have a quarter of headroom.
That is why the calculator prints the markup even when the estimator priced on the margin basis. A margin of eight per cent on the rate sounds thin; the same figure restated as 8.7 per cent of cost tells him the site has to hold within 8.7 per cent of the plan, which is a sentence a project manager can be held to.
The two shock figures underneath apply a ten per cent rise to labour and to materials separately, with the rate held where it is. The rise lands on the direct cost alone — the site and head-office percentages were priced as an allowance rather than as a function of what the material turned out to cost, so treating them as rising too would overstate the damage on the one screen a reader might act on.
The quantity
Overhead priced against a quantity that did not arrive
The loss nobody reports, because the line itself looks correct.
A BOQ quantity is an estimate made by somebody else and it gets remeasured. When the executed quantity comes in below the priced one, two things go missing, and only one of them appears anywhere: the profit that was never earned, which any margin report will show, and the head-office recovery that was loaded into those units, which no report shows at all.
The office costs the same whether the quantity turns up or not. It was priced as a percentage against a quantity and it is measured against a smaller one, so the shortfall lands on a cost that was never re-planned and is never re-allocated. The line looks fine on every report, because the rate was honoured exactly as agreed — the quantity simply was not there.
The calculator prices only the head-office half of the recovery this way. Site running cost is left out of that figure because a shorter quantity often does shorten the site's exposure, and claiming otherwise would be the sort of convenient assumption this page exists to refuse.
Where it stops
What this does not do
It is one line, priced the way you price it. It is not a tender.
- It prices one line. A tender is the sum of a few hundred of them plus the preliminaries carried outside the rates, and the interesting commercial decisions — front-loading, unbalanced bidding, which lines carry the office — are decisions about the set rather than about any member of it.
- It knows nothing about the money between certificate and payment. Retention and the delay before a certificate is paid both cost real financing, and neither appears in a unit rate; the retention release calculator answers that half.
- It has no escalation clause. Where materials are indexed, a ten per cent rise may be partly recoverable, and the tolerance figures here read as though none of it is.
- It treats the recovery percentages as given. Whether eight per cent actually recovers your site running cost depends on the value of work those percentages are spread across, which is a tender-level question this page cannot see.
- It does not know your programme. A line that takes twice as long as planned costs more in time-related cost than in either labour or materials, and nothing on this screen measures duration.
Rate Build-Up Calculator
The model is the easy half
Building a rate is arithmetic. Keeping the build-up alive next to the cost that actually lands, for three years, across four hundred lines, is a system — and it is the one we can help with.
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