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How to calculate your overhead rate as a contractor

If your overhead is a guess, every bid is a guess. Overhead is everything it costs to keep the business open that you can’t charge to one job: the truck payment, insurance, the phone, the office, your own time spent estimating. Here is a simple way to turn last year’s numbers into an overhead rate you can put on every bid.

Step 1. List a year of overhead costs

Pull twelve months from your books or bank statements. Count only costs that don’t belong to a single job:

• Vehicle payments, fuel and repairs for trucks not billed to jobs
• General liability, commercial auto and other business insurance
• Office or shop rent, utilities, phone and internet
• Software, bookkeeping, licenses, bonds and permits not tied to a job
• Tools and equipment that last longer than one job
• Advertising, website and estimating time
• Office or admin wages, and a fair salary for yourself for the time you spend running the business instead of on a job

Leave out job materials, job labor and subcontractors. Those are direct costs and go on each estimate on their own.

Step 2. Total your direct costs for the same year

Add up materials, field labor (with payroll burden), subs, equipment rental and dumpsters you charged to jobs over the same twelve months.

Step 3. Divide

Step 4. Put it on every bid, then add profit

For a job with $12,000 in direct costs, that example business adds $2,400 for overhead ($14,400 total cost), then adds profit on top. If it wants a 10% net margin, the price is $14,400 ÷ 0.90 = $16,000. The free bid markup calculator does this math for you, and the markup to margin chart shows why a 30% markup is not a 30% margin.

Mistakes that quietly eat profit

1. Not paying yourself in overhead. If your own office time isn’t counted, your rate is too low and your “profit” is really your wage.
2. Using one great year. If volume drops, the same overhead spreads over fewer jobs and the rate goes up. Recheck it every quarter or two.
3. Counting overhead twice. If a truck is already billed to a job as equipment, don’t also count it in overhead.
4. Treating overhead as profit. Overhead keeps the doors open. Profit is what’s left after it.

General education with example numbers only, not accounting or tax advice. Your own books, your accountant and your local market should set your real rates.

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