What overhead really costs you (with worked examples)

What counts as overhead

The test is simple: if the cost happens even during a week with no work, it is overhead. If it only happens because a specific job happens, it is a job cost.

Build your annual number from bank statements

Do not estimate this. Open twelve months of business banking and card statements and put every recurring non-job charge into a list. A realistic solo operation often looks like this:

Sixteen thousand dollars leaves the account before a single job is priced. Add unpaid administrative time — estimating, invoicing, chasing payment — and the real burden is higher still.

Turn the annual total into an hourly rate

The usable version of overhead is a per-hour figure you can add to every estimate:

Overhead Rate = Annual Overhead ÷ Annual Billable Hours

Billable hours are the hours you can actually charge for, not the hours you work. A solo contractor working 48 weeks at 45 hours puts in 2,160 hours, but bills perhaps 1,250 of them once you subtract estimating, driving, supply runs, invoicing, and weather.

$16,260 ÷ 1,250 = $13.01 per billable hour

So a 40-hour job carries $520 of overhead. A 6-hour service call carries $78. Those numbers go into the cost side of the bid, before margin.

Be honest about billable hours

Overstating billable hours is the most common way this calculation goes wrong. If you assume 2,000 billable hours and really bill 1,200, your overhead rate is 40% too low and every bid you write for the year is short. Track two weeks with a notepad: billable, drive, admin. Multiply up. Use the real ratio.

The percentage method, and why the hourly one is better

Many contractors add overhead as a flat percentage of job cost — say 15%. It is quick, and it works if your jobs are similar. It falls apart on material-heavy work: a job with $9,000 of cabinets and 10 hours of labor gets loaded with $1,350 of overhead it never consumed, and you lose the bid to someone whose math is closer to reality. Meanwhile a labor-heavy job with cheap materials gets under-loaded.

Overhead is mostly driven by time, so charge it by time. If you prefer a percentage, apply it to labor only, not to the whole job cost.

Overhead is not profit

Recovering overhead means you broke even. Profit sits on top of it. The full stack:

1. Direct labor
2. Direct materials and subs
3. Overhead allocation (hours × overhead rate)
4. = Job cost
5. Bid = Job cost ÷ (1 − target margin)

Skipping step three and calling the margin "the overhead and profit" is how a 25% margin turns into an 11% one by December. See markup vs. margin for the second half of that trap.

Reduce overhead before you raise prices — but not much

Worth auditing once a year: subscriptions you stopped using, insurance you never re-shopped, a storage unit holding tools you would not replace if they vanished. Cutting $200 a month is $2,400 a year, straight to profit.

But you cannot cut your way to a business. Most overhead — insurance, vehicle, phone — is the price of being legitimate. The answer is almost always to price it in, not to strip it out.

Recalculate twice a year

Insurance renews, fuel moves, a new truck payment starts. Re-run the annual total every six months and update the hourly rate you use in your bids. It takes twenty minutes and it is the cheapest raise you will ever give yourself.

The Bid Buddy calculator has an overhead field built into the cost stack, so once you know your rate the allocation happens automatically on every estimate.