Course outline
Overhead: calculating the rate that keeps the lights on
Overhead is every cost of running the business that isn't tied to one job: office staff, estimators, rent, vehicles not charged to jobs, insurance, software, accounting and marketing. Add up next year's overhead and divide it by next year's expected revenue. Your gross margin on every bid has to cover that percentage before there's any profit: with overhead at 25% of revenue, doubling direct cost (a 50% margin) leaves about 25% profit. If you win less work than planned, the same overhead eats a bigger share — so review it as volume changes.
By Michael Reddy, IntelBid
After this lesson you can
- Separate overhead from direct job costs
- Calculate an overhead rate from your budget and expected volume
- Recognize when falling volume means under-recovered overhead
What is overhead, and what isn't?
| Overhead (indirect) | Direct job cost |
|---|---|
| Office manager, estimators, owner's salary | Installers and helpers on the job (burdened) |
| Rent, utilities, warehouse | Material, setting materials, freight, tax |
| Office and general vehicles | Equipment rented for one job |
| General liability and other company-wide insurance | A bond or special insurance required by one job |
| Software, phones, accounting, legal | Dumpsters, permits and parking for one job |
| Marketing, training, safety program | Mobilizations, protection and cleanup for one job |
A cost that you'd only incur because of a specific job is direct and belongs in that job's price. Everything else is overhead. When in doubt, be consistent: the same cost must never be in both.
How do you calculate the overhead rate?
- Budget next year's overheadStart from last year's actual indirect costs in your books, then adjust for hires, rent changes and planned spending.
- Estimate next year's revenueFrom realistic volume: what you expect to install and bill — not what you hope to sell.
- DivideOverhead ÷ expected revenue = overhead as a percentage of revenue. Some contractors also track it per field labor hour, which suits labor-heavy work.
- Price every bid to cover itYour gross margin must be at least your overhead percentage plus the profit you want. At 25% overhead and 25% profit that's a 50% margin — the same as doubling direct cost (see markup vs. margin and building the bid price).
- Budgeted annual overhead
- $600,000
- Expected annual revenue
- $2,400,000
- Expected annual field labor hours
- 24,000
- Pricing
- Double direct cost (50% gross margin)
- As a share of revenue: $600,000 ÷ $2,400,000 = 25%.
- Or per field labor hour: $600,000 ÷ 24,000 = $25 per hour.
- At plan: $2,400,000 revenue leaves $1,200,000 gross profit − $600,000 overhead = $600,000 profit (25%).
- If revenue falls to $1,800,000: $900,000 gross profit − $600,000 overhead = $300,000 profit (16.7%) — the overhead didn't shrink.
What happens when volume changes?
- Less work than planned: overhead is mostly fixed, so it eats a bigger share of every job's margin — and your profit shrinks first.
- More work than planned: you over-recover and can sharpen prices, but more volume usually adds overhead too (another estimator, another truck).
- Review quarterly: compare overhead recovered in won jobs with actual overhead spent.
How do you calculate an overhead rate for construction bids?
Divide budgeted annual overhead by expected annual revenue to get overhead as a percentage of sales, or by expected field labor hours to get a rate per hour. Then price each bid at a gross margin that covers that percentage plus your profit.
What is a typical overhead percentage for a flooring contractor?
It depends on company size, staff and volume, so another company's percentage won't fit yours. Calculate it from your own indirect costs and realistic volume. As an example, a company with overhead at 25% of revenue that doubles its direct cost keeps about 25% profit.
Is overhead the same as profit?
No. Overhead is the cost of running the business. Profit is what remains after direct costs and overhead are covered.
Key points
- Overhead is every cost not caused by a specific job.
- Overhead % = budgeted overhead ÷ expected revenue (or track it per field hour).
- Gross margin must cover overhead % + profit % — double direct cost at 25% overhead leaves 25%.
- The percentage only holds at the volume it was built on — review it.
Get new lessons, plus $100 toward IntelBid
New modules as they're published. Confirm your email and we'll send a $100 credit toward your IntelBid membership.
About the author. Michael Reddy builds IntelBid, bid management software for commercial flooring subcontractors. These lessons come from the bid desk: how the work is priced, won and paid for.