Overhead is the cost of being in business rather than the cost of building anything in particular. It is also the number most often guessed at, which is why a contractor can finish a year with every job apparently profitable and a bank balance that disagrees.
There is no industry percentage to copy. Overhead is a property of your business — your rent, your vehicles, your office staff, your software, your insurance — and the only figure worth using is the one derived from your own accounts.
Job overhead vs general overhead
The two get lumped together and they behave completely differently.
- Job overhead is attributable to a specific project but not to a specific trade: site supervision, temporary power and fencing, portable toilets, the job trailer, permits, site cleanup. It belongs in the estimate as its own cost code, not in markup.
- General overhead is the business running whether or not you win the next job: office rent, the estimator's salary, vehicles and insurance, software, accounting, marketing. It cannot be assigned to a project, so it has to be recovered across all of them.
Working out your recovery rate
The arithmetic is simple; the discipline is having the inputs. Take your annual general overhead from last year's accounts. Take the revenue, or the total direct cost, you expect this year. Divide the first by the second and you have the percentage every job needs to carry before a dollar of profit exists.
A business with $180,000 of annual general overhead expecting $1.2M of revenue needs to recover 15% before profit. If that business quotes at a 15% markup and calls the result its margin, it is working the year for nothing — and a 15% markup is a 13% margin, so it is slightly worse than nothing.
Recalculate it annually, and again whenever you add a vehicle, a salary or a lease. Overhead rises in steps, not smoothly, and the step usually arrives before the revenue that was supposed to justify it.
Why burying it in markup hides the problem
The common approach is a single markup that covers overhead and profit together. It works right up until a job comes in tight, at which point nobody can tell whether the margin was thin because the job underperformed or because the overhead recovery was never in the number.
Separating them costs nothing and answers that question. Price the direct cost, add job overhead as its own line, add overhead recovery, then add profit as a deliberate figure rather than whatever is left over. When a job goes wrong you can then see which part absorbed it.
The three mistakes
Overhead recovery fails in predictable ways.
- Using an industry percentage. Somebody else's overhead is not yours, and a rate copied from a forum is a guess wearing a number.
- Recovering against revenue you did not win. A rate calculated on optimistic volume under-recovers on every job when the volume does not arrive.
- Confusing markup with margin. A 15% markup returns a 13% margin. If your overhead is 15%, you are under water on every job you price that way, and the calculator on this site will show you by how much.
Where the numbers should live
Overhead recovery only works if the direct cost underneath it is real, which means job costing that captures committed cost as well as billed cost. A recovery rate applied to a budget that excludes three signed subcontracts is a rate applied to the wrong number.
In BuildersBridge, job overhead can be carried as its own cost code on the estimate and follow through to the budget, while committed purchase orders and approved bills keep the direct cost current. The recovery percentage is still yours to set — it comes from your accounts, not from software.