Teacher’s Notes — Pricing Fundamentals for MEP Contractors
Construction Queen / Intern Academy • Build. Learn. Preserve.
1) Identify Typical Overhead Categories in MEP Work
Definition: Overhead (OH) = indirect costs required to run the business that don’t sit on a single job.
What to Teach (Talk Track)
- Core OH: office/admin payroll (non-billable PM/estimating time), accounting, insurance (GL/auto/WC/umbrella), software (takeoff/accounting/BIM), licenses/bonds, owner salary, training, small tools/safety, warehouse/yard, non-job fleet, rent/utilities/IT, marketing, legal/CPA, financing costs.
- MEP-specific OH to consider: fabrication shop overhead (sheet metal shop, pipe fab), tool calibration (torque, meters), TAB equipment, refrigerant recovery/handling compliance, code updates/continuing ed, specialty storage for coils/duct/pipe.
- Goal: recover 100% of annual OH through work volume—don’t rely on profit to pay for OH.
Whiteboard Formula (pick a consistent base)
OH Rate (%) = Annual OH ÷ Annual Base
Common bases: (a) Total Cost (labor+material+subs+equip) or (b) Labor base (direct labor $ or hours)
Common bases: (a) Total Cost (labor+material+subs+equip) or (b) Labor base (direct labor $ or hours)
Example — Two bases
| Assumption | Value |
|---|---|
| Annual OH | $480,000 |
| Annual Total-Cost Base | $3,200,000 → OH% = 15% |
| Direct Labor Hours | 24,000 → OH Adder = $20/hr |
Instructor prompt: “Which costs are in OH vs. job direct? What happens if volume drops next year?”
Pitfalls
- Mixing bases across jobs (labor-based one week, total-cost the next).
- Double-counting (carrying a cost in OH and as a job direct).
- Using profit to cover OH—unsustainable and masks pricing risk.
2) Understand Acceptable Profit Ranges and How to Apply Them
Markup (u) on cost: Price = Cost × (1 + u) |
Margin (m) on price: Price = Cost ÷ (1 − m)
Teaching Ranges (calibrate to your market history)
- Competitive bid, new construction (MEP): 8–15% margin
- Renovation / higher risk / occupied / night work: 10–20% margin
- Service / small T&M (all trades): 15–30% margin
Worked Example — Margin to Price
Cost base (after OH & contingency) = $220,000; target margin = 12%
Price = 220,000 ÷ (1 − 0.12) = $250,000
Profit = $30,000 (12% of price)
Margin → Markup: u = m / (1 − m) → 12% margin = 13.64% markup
Markup → Margin: m = u / (1 + u)
Markup → Margin: m = u / (1 + u)
Prompts & Pitfalls
- Prompt: “What margin funds growth (tools, training, reserves)?”
- Pitfall: Saying “10% profit” but applying as markup when you meant margin.
Markup vs Margin — Quick Guide
Plain-English Difference
- Markup is the % you add on cost.
- Margin is the % of the selling price that is profit.
- They’re not interchangeable—using the wrong one undercharges.
Keep These Formulas
Price from markup u:
Price from margin m:
Convert:
Price = Cost × (1 + u)Price from margin m:
Price = Cost ÷ (1 − m)Convert:
Markup = m / (1 − m) • Margin = u / (1 + u)
Same Job, Two Ways (Cost = $100)
- 12% margin → Price = 100 ÷ 0.88 = $113.64 (Profit $13.64)
- 12% markup → Price = 100 × 1.12 = $112.00 (Profit $12.00)
Using 12% as markup when you meant a 12% margin leaves money on the table.
Quick Converter
Markup = — | Multiplier = —
Margin = — | Multiplier = —
Handy Table
| Target Margin | Equivalent Markup | Price Multiplier |
|---|---|---|
| 5% | 5.263% | ×1.0526 |
| 10% | 11.111% | ×1.1111 |
| 12% | 13.636% | ×1.1364 |
| 15% | 17.647% | ×1.1765 |
| 20% | 25.000% | ×1.2500 |
| 25% | 33.333% | ×1.3333 |
| 30% | 42.857% | ×1.4286 |
3) Know How to Include Contingencies for Unknown Conditions
Contingency is a planned reserve for uncertainties (hidden conditions, incomplete info, small scope gaps). Apply by risk, not habit.
Teaching Bands (justify with project risk)
- Clean design-bid: 2–5% of vulnerable costs
- Renovation / occupied: 5–10%
- Fast-track / poor info: 8–15%
Example — Where it goes
| Line | Amount |
|---|---|
| Direct Cost (DC) | $180,000 |
| Contingency @ 5% of DC | $9,000 → Subtotal $189,000 |
| Add OH & profit after this subtotal (see next section). | |
Pitfall: Hiding contingency inside profit—PMs can’t see or manage it.
4) Incorporate Markups Without Losing Competitiveness
Clean, Auditable Pricing Stack (teach the order)
- Direct Cost (DC) = labor + material + subs + equipment
- Contingency (risk-based)
- Overhead recovery (your calculated OH rate)
- Profit (as a margin on selling price)
Full Walk-Through — Numbers on the board
| Step | Calc | Result |
|---|---|---|
| 1) DC | — | $180,000 |
| 2) Contingency 5% | 180,000 × 0.05 | $9,000 → $189,000 |
| 3) Overhead 12% | 189,000 × 0.12 | $22,680 → $211,680 (break-even) |
| 4) Profit margin 12% | 211,680 ÷ (1 − 0.12) | $240,545.45 (Price) |
| Profit dollars = $28,865.45 (12% of price) | ||
Market tactics: cut base cost (prefab, access), not margin; turn some risk into allowances; propose VE alternates that truly reduce risk.
Mini Calculator (optional in class)
Price = —
Break-even = —
Profit $ = —
Electrical — Nuances
- Risk levers: conductor pricing, switchgear lead times, shutdown windows, inspections.
- Contingency cues: existing concealed conduits, device counts, FA coordination.
- Cost levers: prefab whips, kitting, BIM clash avoidance, night work premiums.
Mechanical/HVAC — Nuances
- Risk levers: sheet-metal labor, crane/rigging, equipment lead times, TAB constraints.
- Contingency cues: access for duct runs, structural coordination, refrigerant code updates.
- Cost levers: shop-fab duct/pipe, multi-trade racks, coil protection & storage.
Plumbing — Nuances
- Risk levers: underground unknowns, fixture packages, slope/conflict with structure.
- Contingency cues: tie-ins in occupied facilities, corrosion, vent routing in renovations.
- Cost levers: prefab battery groups, hanger standardization, just-in-time fixture delivery.
Overhead Checklist (MEP)
- Office/admin payroll (non-billable PM/estimating), GL/auto/WC/umbrella insurance
- Office rent, utilities, internet/phones; IT & software (takeoff, accounting, BIM)
- Small tools/PPE, safety program; warehouse/yard; non-job fleet; fuel/maintenance
- MEP shop: sheet-metal shop, pipe fab shop, consumables, QA/QC & calibration
- Training/certifications, licenses/bonds/fees, legal/CPA, marketing/sales, financing
Copy-Paste Cells (Excel/Sheets)
OH% =
Price (target margin) =
Markup from margin =
Margin from markup =
=Annual_OH / Annual_BasePrice (target margin) =
=Base_Cost / (1 - Target_Margin)Markup from margin =
=Target_Margin / (1 - Target_Margin)Margin from markup =
=Markup / (1 + Markup)
Class prompt: “Compute an OH% and $/hr adder from sample annuals; agree on one standard base for the shop.”
Exit Ticket (Assessment)
- Name three overhead items relevant to your trade (Electrical/HVAC/Plumbing).
- Convert a 15% margin to a markup.
- Where do you place contingency in the stack and why?
- Given DC = $300k, contingency 5%, OH 10% (on DC+cont), margin 12%—what is the break-even and the price?
Answer Hints
- OH examples: admin payroll, insurance, software, rent, small tools, fleet (non-job), fab shop overhead.
- Markup = m/(1−m) → 0.15/0.85 = 17.65%.
- Contingency belongs in cost before OH & profit so PMs can use it and pricing stays transparent.
- Walk them through the four-step stack (as in the table above).
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