ARE Handbook - PjM section 4 page 45 - incorrect answer

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    NCARB

    Hi Valerie,

    The 10% profit/overhead is based on $108,810. That means the profit/overhead is $10,881 not $12,090 which is what your calculation includes (11.1% of the cost of the footings, including labor, materials, and miscellaneous equipment).

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    Valerie Galchenko (Edited )
    In order to calculate overhead and profit, we have to divide the cost of footing including labor etc, for inverse percentage number, and not to multiply for (100% + profit percentage). Profit and mark up are 2 completely different terms. 
    • profit refers to the revenue (contractor) makes 
    • mark up is the final price minus its cost (NCARB calculations refer to MARK UP and not PROFIT) 
     
    total cost of the footings, including labor, materials, and miscellaneous equipment costs = x
    total final cost = y
    10% for contractor's overhead and profit
     
    x - cost of footings, including labor, materials, and misc costs ($108,810 = 90% of total costs)
    y - overhead and profit (10% but $$$ equivalent is unknown)
    z - total final costs (includes cost of footings, including labor, materials and misc costs AND contractor's overhead and profit)
     
    x + y = z 
    z = 100% 
    x + y = 100% 
    x = 90% and y = 10% 
    90% + 10% = 100 %
     
    Let's plug in numbers from NCARB example: 
     
    x = 90% = 108,810 
    z = 100% = ??? 
     
    z = ($108,810 x 100%) / 90% = $120,900 
     
     
    z =$120,900 - total final costs (includes: cost of footings, including labor, materials, misc costs - 90%: ($120,900 x .9)= $108,810, and overhead and profit  - 10%: ($120,900 x .1) = $12,090 
    10% + 90% = 100% 
    $108,810 + $12,090 = $120,900 
    (or 90% + 10% = 100%)
     
     
    According to ARE handbook: 
    Final costs = 100% = $119,691 
    (where $119,691 includes  cost of footings, including labor, materials and misc costs (90%) and overhead and profit (10%)
     
    The easiest way to check NCARB calculations:
     
    $108,810 / $119,691 = 0.90909090909, or 91% and not 90%
     
    Now let's check overhead and profit for NCARB suggested final cost (10% of final cost should be overhead and profit):
    $119,691 x .1= $11,969 
     
    The summary: 
    In NCARB ARE handbook
    case, contractor received $119,691 - 108,810 = $10,881 instead of $12,090 (underpaid $1,209) or only 9% profit 
     
    Basically, this is an equation for profit and overhead:
     
    $108,810 / ((100%- target profit%)/100) = $108,810 / .9 = $120,900 
     
    And this is an equation for mark up:
     
    $108,810 x (100% + target profit%) = $108,810 x 1.1 = $119,691
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    Mu-Yen Lee

    I am also confused by this question. 

    NCARB When we calculate for architect's profit in PcM, let's say 20%, usually we use multiply 0.2 only if the profit is already included in the given fee. We would use divide 0.8 when the fee is not yet included the profit.

    So as this question, $108,810 simply is the sum of material and labor and does not account for the desired 10% profit. Like Valerie Galchenko stated, shouldn't we use divide 0.9 instead? 

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    Valerie Galchenko

    Prior to obtaining my M.Arch degree, I worked as a senior analyst for number of financial institutions, and my opinion is that ARE handbook solution DOES NOT show any understanding of the difference between MARK UP and a PROFIT MARGIN. 

    Steps to calculate a percentage based profit margin (let's say, based on 10% profit): 

    • 1. Use 10% in its decimal form, which is 0.1.
    • 2. Subtract 0.1 from 1 to get 0.9 
    • 3. Divide the original price (sum, number) by 0.9
    • 4. The resulting number is how much you should charge for a 10% profit margin. Mark ups are always higher than their corresponding profit margins (as we can see in NCARB case, mark up is 10% when profit is only 9.09%). I think NCARB needs to revisit the question and give the credit to all applicants who answered this question during the exam correctly. Thank you for reading. 
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    Cody Zimmerman

    Are construction documents considered a design phase?

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    Bruce Buescher

    NCARB: Which of these answers is considered correct? The $19,691 per the ARE Handbook, or the $20,900 per the method described by Valerie and the AHPP (p.415 15th E)? I understand the difference between the calculations and am disconcerted by the seemingly incorrect answer given in the ARE Handbook. If a problem like this occurs on the exam and I answer per the AHPP's method for calculating profit, will it be counted incorrect? Thank you. 

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    Valerie Galchenko

    Hi Bruce,

    Thank you for replying. NCARB made an obvious mistake on ARE book demonstration exam and simply keeps ignoring ARE candidates questions. Please check this post as well: 

    https://are5community.ncarb.org/hc/en-us/community/posts/1500000965321-ARE-Handbook-PjM-section-4-page-45-incorrect-answer-

     

     

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