If the original estimates for costs are as follows:
Direct Materials $5,000,000
DIrect Labor $10,000,000
Overhead $2,000,000
Equipment cost are included in cost of direct materials, and should not be treated as a separate line item; they represent 40% of the total (without regard to allowances); construction activity is equal to the sum of the direct materials and direct labor costs (without regard to allowances).
What was the original total estimated cost of construction?

Equipment Design Allowance=3% of equipment costs
Conceptual Design Allowance= 15% of material and labor costs
Construction Quantity Allowance= 5% of construction activity accounts
Escalation Allowance= 12% of equipment costs + 15% of construction activity accounts
Contingency Allowance= 2.9% of base costs of construction
Risk Allowance= 4% of base cost of contract

They use percentage of completion method

What you are doing here is creating an estimate for a construction project. The first thing it asks is that you separate out the equipment costs and show them as a separate line item. They tell you the equipment is 40% of the total shown as material. Your base numbers are therefore:

Materials..............................3,000,000
Equipment............................2,000,000
Labor.................................10,000,000
Overhead.............................2,000,000

To complete your estimate, you are going to compute the allowances. Your question gives you the info to do this. To start:

Equipment design allowance is 3% of equipment, or 3% of $2,000,000 = 60,000.
Calculate each of the allowances, as described. If you have trouble with any, please ask and I'll explain what they mean. I'll also check your work if you like. When you have each allowance calculated, you can list them under the M, E, L, Ohd by line item to come up with your total costs.

The line about percentage of completion method will not come into this procedure for coming up with the estimate. It may be used later in your lesson, but it has to do with the amount of income being earned during the construction based on the amount of work completed to date.

Equip-60,000
Concept-1,950,000 (13,000,000 * 15%)
Construct-650,000
Escalation-2,190,000
Contingency-377,000
Risk-600,000
I add these to DM, DL & OH to get my total then? What about the line stating construction activity?

If the original gross profit margin was to be 15%, what were the original contract price and the original estimate gross margin? I believe this is where I apply the percentage of completion method? Don't know how to go about this step.

Good job on the first four allowances. I'm reading the contingency differently than you. I would take the base costs to means the costs before allowances , $17,000,000 (L,E,M,Ohd) at 2.9% = 493,000. It looks like you used $13 million. I'm not saying I'm right and you are wrong, but you might want to think about that. Similar thing with risk. You used base contract to be $15,000,000. I'm thinking it is $17,000,000.

Right, so you have your lists of 6 allowances that get added to the 4 costs already established (M,E,L,Ohd) to get your estimated cost of construction.

By the line stating construction activity, I think you are wondering why they put this in: construction activity is equal to the sum of the direct materials and direct labor costs (without regard to allowances).
That was simply a definition for you to use when computing the 3rd and 4th allowances.

Comment on Just Looking's post

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If the original gross profit margin was to be 15%, what were the original contract price and the original estimate gross margin? I believe this is where I apply the percentage of completion method? Don't know how to go about this step.

What you have done up to this point is compute the cost of the project. You are now being told there is a 15% markup for profit. That will be computed on your total cost (that is, the M, E, L, Ohd and all allowances). Add that margin to your total costs to get your contract amount. The original gross margin is simply that 15% figure that you compute.

The percentage of completion won't come into play until you get to the point where the project is in progress. What happens is that on a monthly basis you compare your costs to date to the total estimated costs to get the percentage you are complete. That tells you what % of the 15% margin will be recognized to date. It has nothing to do with the estimate at this point.