The following question is included on the Section 3 course video quiz, along with subsequent explanation:
The final calculation, when OH&P is factored in to the change in cost of the revision, constitutes a mark-up of 9% - not a profit of 9%.
Instead of multiplying the cost of the revision ($6760) by 1.09, it should be divided by the inverse target profit percentage, or .91.
The calculation, when using the correct formula, comes to $7428.57. Since the question asks to round to the nearest whole dollar, the correct answer should be:
$7429
Why wouldn’t you multiply the total by 1.09% to get the 9% OH&P amount on top of the cost of the change order?
Nicole - It’s the same concept as calculating firm profit. To calculate profit, you divide by the inverse of the target profit percentage. By multiplying by [1 + target profit percentage], what you’re actually calculating is a mark-up of that percentage.
I’ll need to find the AHPP reference page, but the topic is also often discussed in the NCARB Community - here is an example, which is from the ARE Handbook. Even they get it wrong sometimes.
Here is another discussion, which includes feedback from Gang Chen, Michael Ermann (Amber Book), and Mark Baker (Archizam).
Hope this helps.
