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Contractor glossary

Overhead

Updated

Definition

Overhead is the cost of running your business that isn't tied to a specific job: office and dispatch wages, rent, insurance, marketing, software, phones, accounting and similar costs you pay whether or not today's jobs happen. Your prices have to recover it.

Also called: Overhead costs, Operating expenses, Indirect costs, Fixed costs

What counts as overhead

The test is simple: if you can't tie a cost to one job, it's overhead. Typical lines for a home-service contractor:

  • office, dispatch and sales wages, plus their payroll costs
  • rent, utilities and shop or storage space
  • business insurance (general liability, commercial auto, umbrella)
  • marketing and advertising
  • software, phones and internet
  • accounting, legal, bank and card processing fees
  • licenses, certifications and training
  • vehicles and tools, if you don't charge them to jobs

What stays out: materials, field labor, subcontractors, permits and disposal for specific jobs. Those are cost of goods sold, and job costing tracks them job by job.

Recovering overhead in your prices

No customer pays an overhead line, so every job has to carry a share. There are two common ways to build it in:

  1. In the labor rate. Divide yearly overhead by the billable hours your field team actually sells, and add that to the cost of each billable hour. This is the simplest method for service work. How to set your labor rate walks through it.
  2. In the margin. Price each job to a gross margin high enough that the gross profit across all jobs covers overhead and leaves a profit. This suits project work with a lot of material.

Pick one. If your labor rate already includes overhead and you also mark materials up to cover it, you recover the same costs twice and price yourself out of work you should win.

Example: A pressure washing company with two crews expects $120,000 of overhead next year. The crews will sell about 3,000 billable hours between them. Overhead per billable hour is $120,000 ÷ 3,000 = $40, on top of what each hour of crew labor costs. If the crews only sell 2,400 hours because of rain days and drive time, the real figure is $50 an hour, and every job priced at $40 falls short. The numbers are made up for illustration.

Common mistakes

  • Dividing by paid hours. A tech paid for 2,080 hours a year sells far fewer. Spread overhead over billable hours, or it comes up short.
  • Forgetting yearly and irregular costs. Insurance premiums, license renewals, software subscriptions billed annually and the next truck all belong in the yearly total.
  • Leaving out the owner's office time. The hours you spend quoting, scheduling and doing the books cost something. Count a fair wage for that work in overhead.
  • Letting it creep. Overhead added in a busy season stays when work slows. Check it in dollars every month, not only as a share of revenue.

How it connects

Overhead is the fixed bill your gross profit has to pay. Divide it by your gross margin and you get your break-even point. On the profit and loss statement, it sits between gross profit and net profit, and how to read a profit and loss statement shows how to review it each month. If you price with a markup, check that it leaves enough margin to cover overhead; markup vs margin shows how.

Go deeper

GuideHow to Set Your Labor RateBuild your labor rate from real costs: billable hours, payroll burden, overhead and profit, with worked examples from HVAC, roofing, plumbing and other trades.GuideHow to Read a Profit and Loss Statement for ContractorsRead a contractor P&L line by line: revenue, job costs, gross margin, overhead and net profit, plus cash vs accrual and a 30-minute monthly review.GuideMarkup vs Margin: The Difference That Costs Contractors MoneyMarkup divides profit by cost; margin divides it by price. The formulas, an exact conversion table, the costly mix-up and how to price to a target margin.
Cost of goods soldCost of goods sold (COGS) is what the work you sold in a period cost to deliver. For a contractor, that means direct job costs: materials, field labor with its payroll costs, subcontractors, permits and equipment rented for jobs. Revenue minus COGS is gross profit.Gross marginGross margin is gross profit as a percentage of revenue: what's left of each sales dollar after direct job costs (materials, field labor, subcontractors, permits), before overhead. A $10,000 job that costs $6,000 to deliver has a 40% gross margin.Break-even pointThe break-even point is the revenue at which your business makes zero profit: gross profit from jobs exactly covers overhead. For a contractor, break-even revenue equals fixed overhead divided by gross margin, written as a decimal.MarkupMarkup is the amount you add on top of a cost to arrive at a selling price, expressed as a percentage of that cost. A $100 part sold for $150 carries a 50% markup.Job costingJob costing is recording what each job actually cost (materials, labor at its full hourly cost, subcontractors, permits, disposal and return trips) and comparing it with the estimate and the price, so you can see which jobs made money, which didn't and why.Profit and loss statementA profit and loss statement (P&L), also called an income statement, reports a business's revenue, costs and profit over a period such as a month, quarter or year. It shows whether the work you did made money, not how much cash you have.

See every term in the glossary