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What Is Overhead in a Contracting Business?

Overhead includes business expenses that are necessary to operate the company but are not easily assigned directly to one particular job.

Examples may include:

• Office and administrative payroll
• Rent or shop expenses
• General liability insurance
• Commercial auto expenses
• Software and subscriptions
• Phones and internet
• Accounting and bookkeeping
• Advertising and marketing
• Office supplies
• Professional fees
• Management expenses
• Equipment expenses not charged directly to jobs
• General vehicle expenses
• Licenses and recurring business fees

Direct job costs such as project materials, field labor and job-specific subcontractors are generally handled separately.

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Why Contractors Need to Recover Overhead

Suppose your jobs generate plenty of gross profit, but your company has $150,000 per year in overhead.

That $150,000 still has to come from somewhere.

Ultimately, your customers must pay enough through your pricing to cover:

Direct Job Costs + Company Overhead + Profit

If your estimates recover direct costs and produce some gross profit but don’t collectively recover enough overhead, the business can appear busy while producing little or no net profit.

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Overhead per Productive Labor Hour

One way to understand overhead is to spread it across the productive labor hours your company expects to generate.

The calculation is:

Annual Overhead ÷ Annual Productive Labor Hours = Overhead per Productive Labor Hour

For example:

$150,000 annual overhead

÷

6,000 productive labor hours

=

$25 overhead per productive labor hour

This doesn’t necessarily mean you must literally add $25 to every labor hour on every estimate. It tells you how much overhead each productive hour would need to carry if labor hours were your chosen method of recovering overhead.

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Overhead per Crew Day

Contractors who think in terms of production days may find overhead per crew day even more useful.

Annual Overhead ÷ Annual Productive Crew Days = Overhead per Crew Day

For example:

$150,000 annual overhead

÷

240 productive crew days

=

$625 overhead per crew day

If you operate multiple crews, use the combined number of productive crew days generated by all crews.

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Overhead per Job

Another simple way to look at overhead is by completed jobs.

Annual Overhead ÷ Annual Jobs = Average Overhead per Job

If your company has $150,000 of annual overhead and completes 150 jobs:

$150,000 ÷ 150 = $1,000 per job

That does not mean every job should receive exactly $1,000 of overhead. A $2,000 repair and a $50,000 project obviously consume company resources differently.

But the number provides a useful benchmark for understanding what your jobs collectively need to support.

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How to Calculate Overhead as a Percentage of Revenue

Another common measurement is overhead as a percentage of annual revenue:

Annual Overhead ÷ Annual Revenue × 100 = Overhead Percentage

For example:

$150,000 overhead

÷

$750,000 revenue

=

20% overhead

This means overhead equals approximately 20% of company revenue.

Be careful, however, about simply adding 20% to job cost. Markup and margin are different calculations, and your pricing still needs to produce the desired profit after overhead is recovered.

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Overhead Recovery Is Not Profit

This distinction is critical.

Recovering overhead pays the cost of operating the company.

It does not automatically create profit.

If your company generates enough gross profit to cover exactly:

Direct Costs + Overhead

you’ve essentially reached break-even.

The business needs to generate additional earnings beyond those costs to produce net profit.

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Don’t Count the Same Expense Twice

When calculating overhead, be consistent about which expenses are already included in direct job costs.

For example, if field labor burden is already included in your labor cost calculation, don’t automatically add those same expenses to overhead again.

Likewise, if equipment is charged directly to individual jobs, those costs may already be accounted for elsewhere in your estimating system.

The goal is to understand your total costs — not accidentally recover the same cost twice.

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Overhead Recovery Calculator FAQ

What is an overhead recovery rate?

An overhead recovery rate is a method of allocating company overhead to productive work. It may be expressed per labor hour, crew day, job, revenue dollar or another production measure.

What should a contractor include in overhead?

Overhead commonly includes administrative payroll, office expenses, insurance, software, marketing, accounting, rent and other expenses that cannot easily be assigned directly to individual projects.

What is a good overhead percentage for a contractor?

There is no universal percentage. Overhead varies substantially depending on company size, trade, staffing, equipment, facilities and business model. Your own financial records are more useful than an industry rule of thumb.

Is overhead the same as markup?

No. Overhead is a business cost. Markup is a pricing calculation applied to cost to help produce enough gross profit to cover overhead and generate profit.

Is overhead the same as profit?

No. Recovering overhead pays the operating expenses of the company. Profit is what remains after the company’s expenses are paid.

Should field labor be included in overhead?

Field labor directly associated with performing jobs is generally treated as a direct job cost. Administrative or management labor may be treated as overhead depending on the company’s accounting and costing system.

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