Contractor Business
Contractor Overhead: What to Include and How to Calculate It
Identify every contractor overhead cost, calculate an accurate annual total, and recover overhead consistently in estimates and hourly rates.
Contractor overhead is the cost of keeping the business ready to perform work, even when a specific expense cannot be assigned to one job. If overhead is missing from your prices, profitable-looking jobs can quietly drain cash. The goal is not to inflate estimates—it is to make every job contribute fairly to the cost of operating the company.
WORKED PRICING EXAMPLE
Build the price in seven steps
Annual overhead = Total indirect operating expenses for 12 monthsMonthly overhead target = Annual overhead ÷ 12Overhead per billable hour = Annual overhead ÷ Annual billable hoursExample: $96,000 ÷ 2,400 hours = $40 overhead per billable hourHourly cost = Burdened labor + $40 overhead + other hourly costsFinal price = Complete cost ÷ (1 − Target margin)Example only. Replace every figure with your business’s actual costs and target.Understand overhead versus direct job costs
Direct costs belong to a specific job: field labor, materials, rented equipment, permits, disposal, and subcontractors. Overhead supports the business across many jobs: office work, insurance, vehicles, software, licenses, marketing, and facilities. Classify costs consistently so they are not omitted or counted twice.
List administrative and office overhead
Include nonbillable owner and office wages, payroll burden, bookkeeping, accounting, legal services, phones, internet, office supplies, postage, software subscriptions, banking fees, payment-processing costs not passed through, and bad-debt allowances. Small monthly subscriptions become meaningful when totaled for a year.
Include vehicles, tools, and facilities
Count vehicle payments or depreciation, commercial auto insurance, registration, maintenance, repairs, fuel not charged directly to jobs, tool replacement, calibration, storage, shop rent, utilities, security, and equipment ownership costs. Use one consistent policy for costs that sometimes belong directly to jobs.
Include risk, compliance, and growth costs
General liability insurance, workers’ compensation not included in labor burden, bonds, licenses, continuing education, safety programs, professional dues, estimating time, sales time, website costs, advertising, and customer follow-up all help the company operate or win work. They must be funded by completed jobs.
Calculate annual overhead from real records
Export the previous twelve months of expenses from your bookkeeping system and group each overhead account. Remove owner distributions, income taxes, and direct job costs. Add expected changes for the coming year, such as an insurance renewal, new vehicle, rent increase, or planned hire. Divide the annual total into a monthly target to monitor recovery.
Choose an overhead allocation method
Common methods include overhead per billable labor hour, a percentage of direct job cost, a daily crew rate, or separate rates by department. Hourly allocation works well for labor-driven service businesses; a cost percentage may fit material-heavy work. Use the method that tracks how your business consumes resources, then apply it consistently.
Calculate overhead per billable hour
Divide annual overhead by realistic annual billable hours—not total paid hours. If annual overhead is $96,000 and the company expects 2,400 billable labor hours, overhead is $40 per billable hour. Add that amount to burdened labor and other job costs before solving for the target margin.
Check overhead recovery every month
Compare year-to-date overhead with the overhead recovered through completed work. If sales volume or utilization falls, each remaining job may need to carry more overhead. Review the rate at least quarterly and after major changes in staffing, vehicles, insurance, rent, or marketing.
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