Question

OMG Engineers is a consulting firm that provides design and support services for civil engineering projects. OMG is in the process of preparing a tender for a project involving the extension of the main highway. The tender involves assessing the economic and environmental feasibility of each alternative.

OMG estimates tender costs by identifying all costs that are likely to be directly associated with the project. To obtain the final tender bid, the total professional (engineering and scientist) labour costs are marked up by 80 per cent, and all other costs are marked up by 50 per cent. These margins are intended to cover any indirect costs plus provide the required profit margin on the project.
The following direct costs has been estimated for the highway project:
Input Costs Civil engineers 150 hours $25 000
Environmental scientists 100 hours 15 000
Support labour 120 hours 10 000
Travel 1 000 km 1 000 Computer time 80 hours
2 500 Photocopying, phone, fax 500

Required:
1. Estimate the tender bid for the project. (5 marks)
2. Estimate the profit on the project if the bid is successful and all costs are incurred as planned. (5 marks)
3. Once a project has begun, OMG will use a costing system that tracks all direct costs to projects. If the highway bid is successful, how would managers at OMG use this information? (5 marks)
Note: If rounding off is required, round off your figures to 2 d.p.

Answer 1

OMG Engineers (OMG)

1. The estimated tender bid for the project is $96,000.

2. The estimated profit on the project is $42,000.

3. Managers at OMG use this information to compare the actual costs incurred with the estimated costs. This enables them to determine if they can still achieve the same level of estimated profit, control the project's costs, and to benchmark future projects.

Step-by-step explanation:

a) Data and Calculations:

Markup of total professional (engineering and scientist) labor costs = 80%

Markup of other costs = 50%

Estimated direct costs:

Input Costs Civil engineers 150 hours $25 000

Environmental scientists 100 hours 15 000

Support labour 120 hours 10 000

Total direct labor costs $50,000

80% markup 40,000

Total direct costs $90,000

Other costs:

Travel 1 000 km 1 000

Computer time 80 hours 2 500

Photocopying, phone, fax 500

Total other costs $4,000

50% markup 2,000 $6,000

Total bid costs $96,000

Estimated project profit:

80% markup on direct labor costs 40,000

50% markup on other costs 2,000

Total estimated project profit $42,000