Rent, insurance, van, software, your time in the office. Overhead runs every month, with or without a job, and disappears from the estimate of anyone who does not measure it.
By Miriam Matos · FourRise Consulting
Ask a contractor how much a job costs and he answers right away: material, labor, subs. Ask how much it costs to keep the company open in a month when he closes no jobs, and you get silence. That cost has a name: overhead. It runs every month, with or without work, and it is the first thing to vanish from the estimate of anyone who does not measure it.
Overhead is the cost of existing. You pay rent, insurance, van and software even in a slow month. If that cost is not built into every estimate, it comes out of your profit.
A direct cost is what belongs to a specific job: the material for that house, the labor of that crew, the subcontractor for that service. If the job does not exist, the direct cost does not exist. Overhead is the opposite: it exists regardless of the job. It is the cost of having a company, not of running a project. Confusing the two is where the broken estimate begins.
In residential construction, overhead usually includes:
The item that vanishes most from the math is the owner's time. You spend hours estimating, invoicing, buying material and selling. That work has value, and when it does not go into overhead, the company looks leaner than it is, prices come out low and the owner ends the year exhausted and with no profit. Put your own administrative salary into overhead. If you do not pay yourself for the office work, someone is profiting from your time, and it is not you.
The typical overhead range in construction sits between 25% and 40% of revenue. Small construction businesses usually land at 25% to 35%; those working out of a home office can get close to 20%. The old industry standard, known as "10 and 20", assumes 10% overhead and 20% profit, but in the real world of small companies the actual overhead is higher than 10%, and it is exactly that gap that swallows the profit of anyone using the wrong number.
The math is simple and you do it with a year's numbers:
Any of the three works, as long as you use one consistently. What matters is that no estimate goes out without the overhead share built in.
Every dollar of overhead you do not build into the price comes out of somewhere, and that somewhere is your profit. A construction business that spends US$40,000 a year on insurance and does not put it into estimates is paying to work. Measure overhead once, turn it into a rate and apply it every time. It is the difference between a company that covers the cost of existing and one that finds out, at the end of the year, that it worked the whole year to pay bills that never showed up in the price.
Not all overhead behaves the same. The fixed part does not change with the volume of work: rent, insurance, software, accounting. You pay the same whether you have one job or ten. The variable part follows the movement: fleet fuel, extra administrative hours, commissions. Understanding this difference helps with two decisions. First, it shows your break-even point, that is, how much you need to bill just to cover fixed overhead before thinking about profit. Second, it avoids the illusion that growing dilutes all the cost: part of the overhead grows right along with you.
Many contractors discover overhead the hard way: by growing. Doubling the number of jobs usually demands one more van, one more admin, more insurance, more software. If prices were built with the small company's overhead rate, the bigger company bills twice as much and makes less profit, because overhead went up and the price did not follow. It is the classic "the more I work, the less is left".
That is why overhead has to be measured again at every jump in size. Reviewing the rate once a year, and whenever the structure changes, keeps the price glued to the reality of the company. Overhead is not a number you calculate once and forget: it is a snapshot that has to be updated every time the company grows.
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