Overhead is every dollar it takes to keep the doors open, whether or not a single job is running. Most contractors know roughly what their materials and labor cost. Far fewer know their overhead, and that’s where profit quietly disappears.
If you don’t know your overhead, you can’t know your price. You’re guessing, and the market will happily let you guess low.
Job costs vs. overhead
The line between the two is simple: if a cost exists because of a specific job, it’s a job cost. If it exists because the business exists, it’s overhead.
| Job costs (direct) | Overhead (indirect) |
|---|---|
| Materials for that job | Rent, shop or yard |
| Crew wages and payroll taxes for hours on that job | Office staff and bookkeeping |
| Subcontractors | General liability and other insurance |
| Dumpsters and disposal | Truck payments, fuel and maintenance |
| Permits and inspections for that job | Phones, software and estimating tools |
| Equipment rented for that job | Marketing, website and signs |
| Accounting and legal | |
| Owner’s salary (when not on the tools) | |
| Tools and equipment you own | |
| Unbillable time: estimates, callbacks, warranty work |
A few items can go either way. Truck costs, for example, can be charged to jobs if you track them that closely. Pick one home for each cost and keep it there, so nothing gets counted twice and nothing gets left out.
Step 1: Add up a full year
Pull last year’s profit and loss statement, or the last twelve months from your bookkeeping. List every expense that isn’t a direct job cost and add them up. Use twelve months, not one: insurance renewals, slow seasons and annual software bills make any single month misleading.
Then look ahead. If you’re about to hire an office manager, buy a truck or move into a shop, add those costs now. Price for the business you’ll be running next year, not the one you ran last year.
Step 2: Pay yourself on paper
This is the step most owners skip, and it matters most.
If you’re not on the tools full time, your salary is overhead. Put in what it would cost to hire someone to do your job: estimating, selling, scheduling, managing the crew, handling the books. If that’s $90,000, then $90,000 goes into overhead.
Leave it out and your prices only work as long as you work for free. Your “profit” at the end of the year is really just your wage, and the business itself made nothing.
Step 3: Turn it into a percentage
Divide your annual overhead by your annual revenue:
Overhead % = Annual overhead ÷ Annual revenue
A company does $1,200,000 a year in revenue. Rent, insurance, trucks, office help, software, marketing and a $90,000 owner's salary add up to $180,000.
$180,000 ÷ $1,200,000 = 15% overhead.
So 15 cents of every dollar collected is spoken for before a job makes a cent of profit.
Step 4: Build it into every price
Once you know the percentage, every price has to carry it, plus the profit you want on top. The cleanest way is to price on margin:
Price = Direct job cost ÷ (1 − Overhead % − Profit %)
With 15% overhead and a 10% profit target, a job with $20,000 in direct costs sells for $20,000 ÷ 0.75 = $26,667. About $4,000 of that covers overhead and about $2,667 is profit.
If you’ve been adding a flat percentage to costs instead, read markup vs. margin before you change anything. They aren’t the same number.
When revenue drops, the percentage rises
Here’s the trap. Overhead is mostly fixed. If revenue falls from $1,200,000 to $900,000 and overhead stays at $180,000, your overhead jumps from 15% to 20%. Prices that worked last year now lose money.
So take a fresh look at the overhead number whenever volume changes in a real way. It’s also why a slow season is the worst time to start discounting: when work slows down, every job has to carry more overhead, not less.
A faster check for small shops
If you run one or two crews and the yearly math feels like too much right now, try this:
- Add up your monthly fixed costs, including a fair salary for yourself.
- Count the days your crews actually do billable work in a typical month.
- Divide. That’s what every production day has to cover before there’s any profit.
If monthly overhead is $15,000 and you get 20 production days a month, every crew day has to carry $750 in overhead before you make a dollar. A two-day job that doesn’t leave $1,500 above direct costs is losing you money, no matter how good it felt to close.
What to do next
Write your overhead percentage down and keep it where you write estimates. Then check your last few jobs against it with simple job costing. If those jobs made less than your overhead plus your profit target, your prices are too low, and now you know by how much.