Overhead

What is Overhead?

Overhead refers to the ongoing business expenses that cannot be directly attributed to specific construction projects but are essential for running a contracting business. These costs must be factored into project pricing to ensure profitability.

Understanding and properly calculating overhead is crucial for sustainable business operations.

Types of Overhead Costs

Fixed Overhead

Costs that remain constant regardless of business volume.

Office Expenses

• Rent or mortgage payments
• Utilities and phone service
• Insurance premiums
• Equipment leases

Administrative Costs

• Accounting and legal fees
• Banking and loan payments
• Business licenses and permits
• Software subscriptions

Variable Overhead

Costs that fluctuate with business activity levels.

Marketing & Sales

• Advertising and website costs
• Trade show and networking expenses
• Vehicle fuel and maintenance
• Sales commissions

Operations

• Warehouse or storage costs
• Equipment maintenance
• Training and certification
• Safety equipment and compliance

Calculating Overhead Rate

Annual Method

1. Calculate total annual overhead costs
2. Estimate annual revenue
3. Overhead Rate = Total Overhead ÷ Annual Revenue

Example Calculation

• Annual overhead: $120,000
• Annual revenue: $600,000
• Overhead rate: 20%

This means 20 cents of every revenue dollar goes to overhead expenses.

Overhead vs. Direct Costs

Direct Costs

Expenses directly tied to specific projects:

• Materials for that job
• Labor hours on that project
• Equipment rentals for specific work
• Subcontractor costs

Overhead Costs

Expenses that support overall business operations:

• Office rent (benefits all projects)
• General insurance
• Administrative salaries
• Vehicle expenses

Industry Benchmarks

Small Contractors: 15-25% overhead rate typical.

Medium Contractors: 10-20% overhead rate common.

Large Contractors: 8-15% overhead rate due to economies of scale.

Specialty Contractors: May have higher overhead due to specialized equipment and training.

Managing Overhead

Strategies to Control Costs

Regular Review: Analyze overhead expenses quarterly to identify unnecessary costs.

Efficiency Improvements: Invest in technology and training to reduce administrative time.

Shared Resources: Consider sharing office space or equipment with other contractors.

Accurate Tracking: Monitor which overhead expenses provide the most value.

Common Overhead Mistakes

Underestimating Costs: Failing to include all necessary overhead expenses in pricing.

Not Updating Rates: Using outdated overhead calculations as business grows.

Poor Cost Allocation: Not properly distributing overhead across projects.

Ignoring Seasonal Variations: Not accounting for slower periods with continued overhead.