What an overhead rate is
Overhead is every cost that keeps the business running but can’t be tied to a single job: office rent, admin payroll, owner pay, insurance, vehicles, software and marketing. An overhead rate expresses that cost as a percentage of something you can measure on every job, so each estimate carries its fair share.
Four common ways to measure it
- Overhead ÷ direct job costs. The most practical for estimating. If overhead is 30% of direct costs, a job with $20,000 of costs needs $6,000 of overhead recovery.
- Overhead ÷ revenue. Useful for benchmarking and break-even planning.
- Overhead ÷ direct labor dollars. Works well for labor-heavy trades where materials vary a lot from job to job.
- Overhead per field labor hour. Ideal for service companies that sell time.
From overhead rate to the markup you need
To cover overhead and still keep your target profit, the revenue on each job has to satisfy: price = (direct cost + overhead share) ÷ (1 − profit %). The calculator turns that into a single markup on direct cost you can apply in estimates.
With $300,000 of overhead on $1,000,000 of direct costs and a 10% profit target, the markup is (1 + 0.30) ÷ 0.90 − 1 = 44.4%. That’s a 30.8% gross margin, not 44%. See the markup vs. margin calculator for why.
Keep the categories clean
An overhead rate is only as accurate as the line between job costs and overhead in your books. Field labor burden, job-specific equipment rental and permits belong in direct costs. Shop rent, office staff and company trucks used for everything belong in overhead. A contractor chart of accounts makes the split automatic.
Common questions
How do you calculate overhead rate for a construction company?
Divide total yearly overhead by a base you can measure on every job, usually direct job costs, direct labor dollars, labor hours or revenue. Apply that rate to each estimate so every job carries its share of overhead.
What is a normal overhead percentage for contractors?
It varies with company size, trade and how much is subcontracted. Many small contractors run overhead somewhere between 10% and 25% of revenue. More important than the industry number is knowing yours and pricing for it.
Is owner salary overhead?
Owner pay for running the business (estimating, managing, sales) is overhead. If the owner also works in the field, the field hours can be treated as direct labor at a fair wage.
This calculator gives estimates for general planning. It isn’t tax, legal, lending or accounting advice for your specific situation, and lenders may calculate figures differently.