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Contracting Requirements & General Requirements
Master the hidden costs and requirements that affect every construction estimate
What You’ll Learn
This chapter covers critical elements that affect construction estimates but don’t appear on prints
Contract Types
Understand standard contracts, owner-developed contracts, and job-specific contracts that govern project requirements.
Material Takeoff
Master area and volume calculations using square feet, cubic yards, and proper measurement systems.
Labor Pricing
Learn how to calculate labor costs using quantities, rates, and understand the most reliable data sources.
Equipment Costs
Determine ownership vs. rental costs, depreciation methods, and total equipment operation expenses.
Overhead
Identify and calculate utilities, insurance, bonds, permits, licenses, taxes, and benefits.
Profit Methods
Explore percentage basis, cost-plus, time-and-material, and integrated project delivery approaches.
📌 Key Concept
Many items that affect a project do not appear on the prints. Reviewing the contracting requirements and general requirements is critical to making important decisions about company workload, schedules, and business issues. These “hidden” costs can make or break a bid.
Procurement & Contracting Requirements
Understanding the structure and requirements before you bid
Three Types of Construction Contracts
1. Standard Contracts
- From AIA or Consensus DOCS
- Cover various project models
- Available in hard copy or digital
- Widely accepted formats
2. Owner/Contractor Developed
- Custom for specific entity
- Legal counsel creates them
- Fits business model
- Used for majority of their bids
3. Job-Specific Contracts
- Customized for one project
- Must review carefully
- Unique requirements
- Non-standard terms
⚠️ Critical Review Required
Contract models, construction company owners, estimators, subcontractors, and suppliers should carefully review ALL aspects of the construction contract prior to beginning any portion of the construction process, including bidding.
What’s Included in Procurement Documents
📝 Solicitation Info
Instructions to bidders about scope, relationships, and requirements for DBEs, WBEs, and MBEs
📅 Schedules
Project timelines, phases, milestones that must coordinate with company capacity and resources
🏗️ Site Conditions
Surveys, soil conditions, hazardous materials, utilities, geotechnical information
📄 Forms
Bid forms, allowances, bonding, insurance certificates, substitutions, closeout documents
DBE (Disadvantaged Business Enterprises), WBE (Women-Owned Business Enterprises), and MBE (Minority-Owned Business Enterprises) requirements specify percentages of utilization for various business types.
Example: A project might require 15% DBE participation, 10% WBE, and 8% MBE. These are taken into consideration during outreach for construction team members.
Material Quantity Takeoff
Calculating what you need with precision
🎯 Critical Rule
Material quantities are calculated based on the type of material required. Items for quantity takeoffs are located in the specifications and on the prints. The quantity for each item is calculated and entered into a ledger sheet, spreadsheet, or estimating program.
Measurement Units
| Material Type | Units Used | Examples |
|---|---|---|
| Area Materials | Square feet, Square yards | Flooring, ceilings, roofing, masonry |
| Volume Materials | Cubic feet, Cubic yards | Concrete, earthwork, excavation |
| Linear Materials | Linear feet | Piping, trim, fencing |
| Counted Items | Individual units | Doors, windows, fixtures, switches |
⚠️ Always Check Your Units!
Estimators must check the specifications and prints to determine whether English or metric units are used. Mixing units is a common and costly mistake.
Calculating Area (Square Feet/Yards)
Remember: 9 square feet = 1 square yard
Problem: Calculate the area in square yards of Room 255, which measures 8′-10″ × 23′-6″
-
Convert values
8′-10″ = 8.83′
23′-6″ = 23.5′ -
Perform calculation
A = w × l
A = 8.83′ × 23.5′ = 207.5 sq ft -
Convert to required unit and round up
A = 207.5 ÷ 9 = 23.06 sq yd
A = 24 sq yd (always round UP)
💡 Multiple Uses
The area of 207.5 sq ft can be used for suspended ceiling takeoff, while 24 sq yd can be used for carpet — one calculation serves multiple purposes!
Calculating Volume (Cubic Feet/Yards)
Remember: 27 cubic feet = 1 cubic yard
Problem: Calculate the volume of concrete in cubic yards for a footing measuring 9″ × 1′-6″ × 135′-0″
-
Convert all to same units
9″ = 0.75′
1′-6″ = 1.5′
135′-0″ = 135′ -
Perform calculation
V = t × w × l
V = 0.75′ × 1.5′ × 135′ = 151.875 cu ft -
Convert to cubic yards and round up
V = 151.875 ÷ 27 = 5.625 cu yd
V = 6 cu yd (always round UP)
🧮 Interactive Area Calculator
⚠️ Critical Reminder
ALWAYS ROUND UP when calculating material quantities. There are no partial portions of a cubic yard of concrete or square yard of carpet in construction estimates.
Labor Pricing
Understanding the human cost of construction
Labor quantity (hours required) × Labor rate (cost per hour)
Labor Quantities
It takes 0.75 hours for a tradesworker to set a metal doorjamb and install the metal door.
Calculation for 12 doors:
12 doors × 0.75 hr/door = 9.0 labor hours
Sources of Labor Quantity Data
🏆 Historical Data (MOST RELIABLE)
- Based on past company jobs
- Actual crew performance
- Company-specific methods
- Becomes more reliable over time
Why It’s Best
Reflects your actual crew productivity and methods, not industry averages.
📊 Standard Labor-Unit Tables
- Industry practice based
- Available from third parties
- Digital format available
- Good when no historical data
💻 Estimating Programs
- Linked to database
- Auto-retrieves quantities
- Entered with materials
- Efficient for large projects
⚠️ Never Rely Solely on Tables or Historical Data
Estimators should not rely solely on either standard or historical labor quantity data. Always adjust for actual job-site conditions:
- Difficult site access
- Security screening requirements
- Weather conditions
- Site-specific challenges
Best Practice: Consult with project manager, visit the site, and work with construction team members to determine site-specific adjustments.
Labor Rates
🎯 Key Fact
Labor rates are typically one of the higher risk items in the calculation of a construction bid.
What’s Included in Labor Rates
- ✓ Base wages
- ✓ Fringe benefits
- ✓ Taxes
- ✓ All associated overhead
Factors Affecting Rates
- 📍 Geographic area
- 🏗️ Job-site requirements
- 📊 Market conditions
- 👷 Type of work
- Historical Company Data (Most Reliable) – Based on past experience in your geographic area
- Local Trade Associations – Provide permits, benefits, and tax rate information
- Government Agencies – Department of Commerce or Department of Labor wage tables
- Prevailing Wage Laws – Where applicable, must use locally determined rates
📅 Project Duration Affects Rates
The duration of a construction project may affect labor rates since allowances must be made for any applicable wage, tax, or benefits raises during the construction process.
On lengthy construction projects with many tradesworkers, estimators should include wage-rate increases in the overall labor costs.
Equipment Costs
Ownership, operation, and allocation strategies
🚜 Equipment Categories
Equipment used on construction projects includes:
- Power equipment – earthmoving, hauling, lifting
- Temporary job-site equipment
- Communication equipment
Purchase vs. Rent vs. Lease Decision
💵 Purchase
- Own the equipment
- Long-term investment
- Good for frequent use
- Depreciation considerations
- Maintenance responsibility
📅 Rent
- Fixed cost per time unit
- Flexible for project needs
- No long-term commitment
- Good for specialized equipment
- Minimizes idle equipment
📝 Lease
- Contract-based usage
- Set time and cost
- More economical than purchase
- Predictable expenses
- Flexible duration options
Total Equipment Operation Costs
💼 Owning Costs (Fixed)
Ongoing regardless of operation
- • Depreciation
- • Interest
- • Insurance
- • Taxes
⚙️ Operating Costs (Variable)
Based on amount of use
- • Fuel and lubricants
🔧 Maintenance Costs (Variable)
Based on amount of use
- • Repairs (parts + labor)
- • Mechanic costs
- • Tires
👤 Wages
Operator labor costs
- • Equipment operator wages
- • Local labor conditions
- • Type of work
⚠️ Equipment Overhead is Separate
Equipment overhead is NOT included in owning and operating costs.
Equipment overhead includes indirect costs such as:
- Supervision
- Mobilization (moving equipment to/from site)
- Storage
- Additional insurance
Depreciation Methods
📊 Straight-Line Method
$50,000 ÷ 10 = $5,000/year
Same amount every year (10%)
📉 Double-Declining Balance
10% × 2 = 20%
Year 1: $50,000 × 20% = $10,000
Year 2: $40,000 × 20% = $8,000
Year 3: $32,000 × 20% = $6,400
Decreases each year
✅ Important
Regardless of the depreciation method used, a depreciation cost is included in equipment cost.
The company auditor provides an annual depreciation cost for each piece of equipment. This can be prorated based on the amount of time equipment is used on a particular job.
Overhead Costs
The hidden expenses that keep the business running
💼 Definition
Overhead: Any business expense that is not chargeable or readily allocated to a particular part of a construction project.
As a bid is generated, a certain percentage of the overhead costs are allocated to each construction project to ensure the company can continue operations.
Major Overhead Categories
Temporary Utilities
Electric, natural gas, LP gas, and other utility services necessary on a job site for field office, power tools, lighting, and security.
Insurance & Safety
Public liability, fire and extended coverage, coinsurance, safety programs, OSHA/MSHA compliance.
Bonds
Performance bonds, completion bonds, and street bonds that protect the owner and ensure project completion.
Permits & Licenses
Written permissions and privileges from government agencies, plus inspection fees for code compliance.
Taxes & Benefits
Social Security, Medicare, workers’ compensation, health, welfare, pension benefits, sales tax.
Office Staff
Management, marketing, clerical services, accounting, and office operating costs prorated across all jobs.
Three Types of Bonds
🏗️ Performance Bond
Guarantees: Contractor will execute the project in the manner described in inherent documents
Amount: May be for entire cost of job
Purpose: Ensures contractor completes the work as bid
✅ Completion Bond
Guarantees: Project will be fully completed and free from liens
Amount: Usually equal to total estimate
Purpose: Protects against weather, labor issues, material shortages
🛣️ Street Bond
Guarantees: Repair of streets adjacent to construction if damaged
Amount: Noted in specifications
Purpose: Protects public infrastructure
Insurance Types
Contractor Public Liability
Covers bodily injury or death from accidents during construction. Both contractor AND subcontractor must carry this.
Fire & Extended Coverage
Covers loss by fire, wind, tornado, natural disasters. Protects items, equipment, and damages during construction.
Coinsurance (OCIP/CCIP)
Divides coverage among companies for lower rates. Owner-Controlled or Contractor-Controlled Insurance Programs.
Fringe benefits are calculated on a cost per hour basis and added to labor cost and unit pricing:
- Health benefit coverage – Medical insurance
- Pension plans – Retirement contributions
- Social Security – Mandatory federal tax
- Medicare – Healthcare tax
- Workers’ compensation – Injury/illness protection
- Unemployment benefits – State/federal programs
Base wage: $35.00/hour
Health benefits: $4.50/hour
Pension: $3.25/hour
Total labor rate: $42.75/hour
⚠️ Office Overhead Proration
The basic costs of the contractor and subcontractor office staff and office facilities are prorated across ALL jobs performed by the contractor or subcontractor.
Each company handles their own overhead independently – the general contractor does NOT prorate the subcontractor’s office costs.
Profit Determination
Methods for ensuring business sustainability
💰 Definition
Profit: The amount of money remaining at the completion of a project in excess of all project and company expenses.
As with any business, the purpose of undertaking a construction project is to make a profit for the company after consideration of all project and overhead costs.
Factors Affecting Profit Margins
📊 Company Workload
Companies may add higher profit when workload is large and additional costs of doing business will be incurred.
🏗️ Market Conditions
Local construction market workload and competitive outlook affect what profit margins are sustainable.
👥 Number of Bidders
Lower number of bidders may allow a company to take a risk on a higher profit margin.
⚠️ Project Risk
High-risk projects require higher profit margins because there is a higher chance of losing money.
📊 Direct Link
A direct link exists between the level of profit in a construction project and the level of risk.
Three Main Profit Methods
📊 Percentage Basis
How it works: A percentage is added to the final estimated cost after all materials, labor, overhead, and equipment costs are calculated.
Total project costs: $500,000
Profit percentage: 8%
Profit: $500,000 × 8% = $40,000
Final bid: $540,000
Result: Fixed price for owner
💵 Cost-Plus Basis
How it works: Costs are submitted for payment (labor, material, equipment, overhead), then an amount or percentage is added for profit.
Actual costs: $500,000
Agreed profit: 10%
Profit: $50,000
Total payment: $550,000
Result: Profit guaranteed, but no fixed price for owner
⏰ Time-and-Material Basis
How it works: Owner pays fixed rate for time spent on project and pays for all materials. Profit is built into labor rate.
Labor: 100 hrs × $75/hr = $7,500
(includes $20/hr profit)
Materials: $2,500
Total: $10,000
Result: Used for small jobs, profit in labor rate
IPD = Integrated Project Delivery
Profit sharing is a common model in IPD where members of the construction team work collaboratively to determine a profit margin and then work together to meet or exceed various performance criteria throughout the project.
How It Works
- Team collaboratively determines profit margin
- Work together to meet/exceed performance criteria
- Savings are shared among all team members
- Losses are also shared among all team members
Advantage: Shared profit/loss structure encourages collaboration and efficiency
Test Your Knowledge
Apply what you’ve learned to real-world scenarios
Calculation Practice
Problem 1: Calculate the area in square yards of a room measuring 15′-3″ × 22′-9″
Problem 2: Calculate cubic yards of concrete for a footing: 10″ × 1′-8″ × 180′-0″
Problem 3: If it takes 0.85 hours to install one window and you have 24 windows, how many labor hours do you need?
Concept Quiz
Real-World Application Exercise
Scenario: Small Office Building Bid
You’re estimating a small office building project. Use the information below to answer the questions:
• Office space: 3,500 sq ft (needs carpet)
• Concrete slab: 12″ × 40′ × 90′
• 18 interior doors to install (0.75 hr each)
• Carpet: $4.50/sq yd installed
• Labor rate: $45/hr (includes overhead)
• Equipment depreciation: $2,500 for project
• Project overhead: 12% of direct costs
• Desired profit: 8%
Calculate:
- Square yards of carpet needed
- Cubic yards of concrete needed
- Labor hours for doors
- Total door installation cost
- Estimated carpet cost
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