Construction Overhead: What It Is and How to Price It In

I run a remodeling company and built a job costing app, and overhead is the thing that quietly ate more of my early margin than any bad material price ever did. A job can hit its budget on lumber, tile, and labor and still lose money, because nobody put the truck payment, the insurance bill, or the two unbillable hours a day into the price. That gap does not show up on the job's invoice. It shows up at tax time, when the company as a whole made less than the sum of its "profitable" jobs said it should have.

What counts as overhead — the four types

Overhead is not one lump. It splits into four types, and knowing which type a cost is tells you how it behaves as your volume changes.

The line that trips contractors up most is the one between overhead and a job cost. A dumpster rented for one remodel is a job cost — it belongs to that job and nowhere else. A storage unit that holds tools and leftover material for every job you run is overhead. Let job costs drift into overhead and two things go wrong at once: every job looks more profitable than it was, and your overhead percentage swells, which makes every future bid you price off it heavier than it needs to be.

What does 20% overhead mean?

It means your overhead — the fixed and variable costs above — equals 20% of your revenue. Concretely: if your company brings in $500,000 a year and spends $100,000 of that on the truck, insurance, office, software, and everything else that is not a direct job cost, your overhead rate is $100,000 ÷ $500,000 = 20%.

That percentage is not a target you pick — it is a fact about your company that you calculate from real numbers, the same way you would read a thermometer. What you dopick is whether your prices account for it. A $30,000 job with $22,000 of direct job costs needs to carry $4,400 of overhead (20% of the job cost) before a single dollar becomes profit. Price that job at $26,400 and you have covered your costs and your overhead and made nothing. Price it at $22,000 because that is what the material and labor added up to, and you have quietly donated $4,400 of your own company's running costs.

Typical overhead percentages for contractors

This is the question everyone actually wants answered, and the honest version is: there is no single defensible industry-average number, because overhead is a function of your trucks, your office, and your revenue, not a constant. Run the calculation for a lean one-truck operation with almost no office overhead and you can land near 10%; run it for a shop carrying office staff, several vehicles, and real marketing spend and it can pass 30%. That spread is exactly why you calculate yours instead of borrowing a number.

In insurance restoration work you will hear "10 and 10" — shorthand for 10% overhead plus 10% profit on top of job costs, 20% combined. That figure comes from insurance-industry pricing convention, not from a measurement of your company. If your real overhead runs higher than 10% and you bid restoration work at "10 and 10," you are covering your overhead out of the profit line, which means the job that looks like it earned 10% actually earned less, or nothing.

The only number worth building your prices on is the one you calculate yourself, from your own year of spending. That is the next section.

How to calculate your own overhead rate

Four steps, and the only hard part is being complete about step one.

1. List every cost that is not tied to one job. A full year, not a good month. Truck payments and fuel for company vehicles, general liability and workers comp insurance, phone and internet, accounting and job costing software, shop or storage rent, marketing, and the wages of anyone who is not swinging a hammer on a billable job — an office manager, a salesperson, or your own time spent estimating and driving between jobs instead of building.
2. Add them up. That total is your annual overhead.
3. Divide by annual revenue.Overhead ÷ revenue = your overhead rate, expressed as a percentage.
4. Recalculate when something changes. A new truck, a hired office manager, or a 40% jump in revenue all move the percentage. It is not a number you set once — treat it the way you treat a fuel gauge, not a serial number stamped on the business.

A worked month: a small remodeling shop's real ledger

The month below is an illustrative example for a small remodeling shop — not my real books, but the shape is one I recognize from my own — scaled to a year for the rate calculation.

The line most contractors leave off entirely is the owner's unbillable time. Every hour spent driving to a supply house, walking a bid, or doing paperwork is an hour not billed to a job — and it still costs the company money the same way the truck payment does. Leaving it off does not make it free. It makes your overhead rate look smaller than it actually is, which means every price you set off that rate is short.

Applying overhead to a job that looked profitable and wasn't

Take a $40,000 bathroom remodel with $28,000 of direct job costs — materials, labor, subs, permits. Priced at $40,000, the job appears to clear $12,000, a 30% margin. Nobody would call that a bad job.

Now apply the 17.5% overhead rate from the ledger above. $28,000 of job costs carries $4,900 of overhead ($28,000 × 17.5%) before any profit exists. Subtract that from the apparent $12,000 gain and the real profit is $7,100 — an 18% margin, not 30%. The job did not get worse. The number was always wrong; it just did not include the truck, the insurance, or the estimating time that job actually consumed on its way to getting built.

That is the whole case for pricing overhead in up front instead of discovering it at tax time: a job that "looks" profitable and a job that is profitable are only the same job when overhead is already in the price.

How to recover overhead in your pricing

Once you know your overhead rate, add it to every bid the same way, every time — the discipline matters more than the exact percentage.

• Add your overhead rate to job costs before you add profit. Job cost + overhead = your real cost. Profit gets added on top of that, not on top of the bare job cost.
• Use a calculator instead of doing this in your head on a jobsite. The free overhead and profit calculator takes your overhead percentage and a job's costs and gives you the price and the real margin, including the "10 and 10" math above.
• Know the difference between markup and margin before you set either. A markup percentage and a margin percentage are not the same number even when people use them interchangeably — see markup vs. margin for the conversion, and the markup calculator to run your own numbers.
• Recheck the rate at least once a year. A revenue jump without a new truck or a new hire actually lowers your overhead percentage, because the same fixed costs are spread across more jobs — worth knowing before you underbid the next one.

Where overhead hides

Most contractors do not lose their overhead calculation to bad math. They lose it to receipts and hours that never get logged in the first place — a supply-house ticket that never made it into the books, a half-day of driving between three bids that never got counted anywhere. If the raw numbers going into step one above are incomplete, the overhead rate coming out of it is wrong no matter how carefully you divide.

That capture problem is what I built Job Cost Proto close. Snap a receipt at the counter and the AI reads it and files it to its job — and the costs that don't belong to any one job stay captured instead of disappearing into a shoebox, so every job shows a live margin instead of a year-end surprise. It does not do estimating or scheduling, and it is iPhone only today. Free on the App Store: 3 projects, 50 receipts a month, AI scanning included, no card. Get it here.

One last thing, said plainly: none of this is tax or accounting advice. I am a contractor who got tired of guessing at his own numbers, not your CPA. Your overhead rate is specific to your business — use the method above to calculate it, and bring the result to a professional who can see your actual books.