The total price of a construction project is the sum of direct costs, contingency costs, and margin.
Direct costs are the labor, material, and equipment costs of project construction.
For example, the direct cost of a foundation of a building includes the following:
Costs of formwork, reinforcing steel, and concrete Cost of labor to build and later strip the formwork, and place and finish the concrete Cost of equipment associated with foundation activities, such as a concrete mixer Contingency costs are those that should be added to the costs initially calculated to take into account events, such as rain or snow, that are likely to occur during the course of the project and affect overall project cost. Although the effects and probability of occurrence of each contingency event cannot be accurately predicted, the total effect of all contingencies on project cost can be estimated with acceptable accuracy.
Margin (sometimes called markup) has three components: indirect, or distributable, costs; company-wide, or general and administrative, costs; and profit.
Indirect costs are project-specific costs that are not associated with a specific physical item. They include such items as the cost of project management, payroll preparation, receiving, accounts payable, waste disposal, and building permits.
Company-wide costs include the following: (1) Costs that are incurred during the course of a project but are not project related; for example, costs of some portions of company salaries and rentals. (2) Costs that are incurred before or after a project; for example, cost of proposal preparation and cost of outside auditing.
Profit is the amount of money that remains from the funds collected from the client after all costs have been paid.