# What Is Overhead, and How Do Contractors Calculate It?

Overhead is every cost of running a business that isn't tied to a specific job: office staff, rent, trucks, insurance, phones, software, marketing and the owner's salary. Contractors calculate an overhead rate by dividing a year of overhead by revenue, billable hours or jobs. $360,000 of overhead on 5,200 billable hours is $69.23 per hour.

## Key takeaways

- Overhead is the cost of being in business; job costs are the cost of doing a job. If a cost would still be there in a month with no work, it's overhead.
- Overhead rate as a % of revenue tells you the gross margin you need. Overhead per billable hour tells you what to add to labor rates.
- Divide by billable hours, not paid hours. Using paid hours makes overhead look much cheaper per hour than it really is.
- Include a market salary for the owner. Unpaid owner time hides real overhead and leads to underpricing.
- Recalculate at least once a year, and whenever you add a truck, an office hire or a new location.

## What counts as overhead for a contractor?

Overhead for a contractor is any cost you'd still pay in a week when no jobs ran: the office, the people who answer phones and schedule work, vehicles, insurance, software, marketing, professional fees and your own management salary. Materials, field labor, subcontractors and job permits are not overhead; they're [cost of goods sold](https://www.brix.so/learn/cost-of-goods-sold) and get priced into each job directly.

**Common overhead lines in a trades business**

| Category | Examples | Easy to forget |
| --- | --- | --- |
| Office and admin labor | Office manager, CSRs, dispatcher, bookkeeper, with their payroll taxes and benefits | Paid time off and the [labor burden](https://www.brix.so/learn/labor-burden) on office wages |
| Owner's salary | A market wage for running the business | Owners who "just take draws" leave this out entirely |
| Vehicles | Truck payments or depreciation, fuel, insurance, repairs, tires, GPS | Replacement fund for the next truck |
| Facility | Shop or yard rent, utilities, storage, shop supplies | The warehouse share of a home office |
| Insurance and licensing | General liability, commercial auto, umbrella, bonds, license renewals | Annual premiums paid in one lump |
| Sales and marketing | Ads, Local Services Ads, website, signage, truck wraps | Unbooked leads you paid for |
| Technology and phones | Field service software, phones, accounting software, call tracking | Per-user fees that grow with headcount |
| Professional fees and finance | CPA, legal, bank fees, loan interest | Card processing (often better treated per job; see [contribution margin](https://www.brix.so/learn/contribution-margin)) |
| Unbilled field time | Training days, shop time, warranty callbacks | Some shops put this in overhead, others in labor burden; pick one |

## How do you calculate overhead for a contracting business?

Add up 12 months of overhead from your books, then divide by the base you price with: revenue, billable hours, direct costs or jobs. Each gives a different overhead rate, and each answers a different pricing question. Use last year's actual numbers, adjusted for anything you know is changing this year.

**Overhead rate formulas**

```
Overhead % of revenue = Overhead ÷ Revenue   |   Overhead per billable hour = Overhead ÷ Billable hours   |   Overhead % of direct cost = Overhead ÷ Direct costs
```

Where:
- Overhead = 12 months of indirect costs, including a market salary for the owner
- Revenue = 12 months of billed revenue, before sales tax
- Billable hours = hours techs spent on work a customer paid for, not hours on payroll
- Direct costs = materials, burdened field labor, subcontractors, permits and disposal

> **Worked example: a four-truck electrical shop**
>
> Illustrative numbers. Annual overhead: office manager and CSR with burden $110,000; owner's salary $90,000; shop rent $36,000; four trucks (payments, fuel, insurance, repairs) $64,000; insurance $18,000; software and phones $12,000; marketing $24,000; accounting and legal $6,000. Total: **$360,000**.
>
> Revenue was $1,200,000, so overhead is **30% of revenue**. Direct job costs were $780,000, so overhead is **46.2% of direct cost**.
>
> Four electricians each logged about 1,300 billable hours: 5,200 in total. Overhead per billable hour = $360,000 ÷ 5,200 = **$69.23**.
>
> The shop ran 1,600 jobs over 250 working days: **$225 of overhead per job** and **$1,440 per working day**, before a single wire is pulled.

The [overhead rate calculator](https://www.brix.so/tools/overhead-rate-calculator) runs these numbers from your own totals, and the [contractor hourly rate calculator](https://www.brix.so/tools/contractor-hourly-rate-calculator) shows how overhead per hour feeds into what you charge.

## Which overhead rate should you use?

Use the rate that matches how you price. Each one plugs into a different part of the estimate, and all of them come from the same overhead total.

**Overhead rates and what each one is for**

| Rate | Example (from above) | Use it to | Watch out for |
| --- | --- | --- | --- |
| % of revenue | 30% | Set your target [gross margin](https://www.brix.so/learn/gross-margin): overhead % plus profit % | It shifts if your revenue mix changes |
| Per billable hour | $69.23 | Build an hourly or [flat-rate](https://www.brix.so/learn/flat-rate-pricing) labor price | Billable hours drop in slow season, so the real rate rises |
| % of direct cost | 46.2% | Apply as a markup on cost for bid work and [cost-plus](https://www.brix.so/learn/cost-plus-pricing) jobs | Material-heavy jobs end up carrying more overhead than they create |
| Per job | $225 | Sanity-check small tickets and set a minimum service charge | Big and small jobs don't use the same overhead |
| Per day | $1,440 | Know what a rain day or an empty schedule costs you | It doesn't tell you how to price a specific job |

> **Billable hours, not paid hours**
>
> The same four electricians were paid for 8,320 hours (4 × 2,080). Divide overhead by paid hours and you get $43.27 an hour, about $26 less than the real $69.23.
>
> Price from the lower number and every billable hour comes up $26 short of covering overhead. See [billable hours](https://www.brix.so/learn/billable-hours) for how to count them.

## Overhead by trade

Every trade carries overhead, but the big lines and the best way to allocate them differ.

**Biggest overhead lines and the allocation that fits, by trade**

| Trade | Biggest overhead lines | Allocation that usually fits | Why |
| --- | --- | --- | --- |
| HVAC | CSRs and dispatch, fleet, seasonal marketing | Per billable hour | Service work is priced by the task or hour, and demand swings by season |
| Plumbing | Stocked trucks, on-call coverage, office staff | Per billable hour | Many short jobs a day; overhead is driven by tech time |
| Electrical | Estimating time, licensing and training, vehicles | Per hour for service; % of direct cost for bids | Bid work and service work behave differently |
| Roofing | Sales team and lead costs, production office, warranty reserve | % of revenue or per roof | Few large jobs; overhead follows sales effort more than crew hours |
| Landscaping | Equipment, trailers, yard, winter payroll | Per crew-hour, recovered over the working season | Twelve months of overhead has to be earned in the months crews can work |
| Cleaning | Hiring, training, supervision, insurance and bonding | Per labor hour | Nearly all cost is labor, so hours are the natural base |

## Overhead vs. direct costs

Direct costs exist because of a specific job; overhead exists because the business does. A tech's wage on a service call is a direct cost. The dispatcher who sent that tech is overhead. Keeping the two separate in your books is what makes [job costing](https://www.brix.so/learn/job-costing) and a readable [profit and loss statement](https://www.brix.so/learn/profit-and-loss-statement) possible.

Overhead is also different from [labor burden](https://www.brix.so/learn/labor-burden). Burden is the extra cost on top of each field employee's wage (payroll taxes, workers' comp, benefits, paid time off) and belongs in direct labor cost. Overhead is everything the business spends that isn't tied to a job.

## Common overhead mistakes

- **Leaving out the owner's salary.** If you'd have to pay someone to do your job, that wage is overhead.
- **Dividing by paid hours.** It understates overhead per hour by the share of hours nobody pays for.
- **Using an old number.** A new truck, an office hire or an insurance renewal can move your rate several dollars an hour.
- **Forgetting annual and lumpy costs.** Insurance premiums, license renewals and software paid yearly belong in the total.
- **Putting field labor in overhead.** It inflates overhead and overstates gross margin at the same time.
- **Applying one rate to everything.** A material-heavy install and a labor-heavy repair shouldn't carry overhead the same way.

BRIX keeps expenses categorized as they come in and syncs with QuickBooks, and crew timesheets record job hours, so you have both halves of the overhead rate: what the business spent and how many hours you actually billed.

- [Bookkeeping and tax help](https://www.brix.so/features/bookkeeping-taxes): Keeps expenses categorized, tracks 1099 subcontractors and sales tax, and reminds you of quarterly estimated tax dates. BRIX does not file taxes or give tax advice.
- [QuickBooks sync](https://www.brix.so/integrations/quickbooks): Syncs customers, invoices and payments with QuickBooks so the books match the jobs.
- [Crew timesheets](https://www.brix.so/#use-cases): Clock-ins, job hours and payroll-ready timesheets.

## Frequently asked questions

### How do you calculate overhead percentage for a contractor?

Divide 12 months of overhead by 12 months of revenue. $360,000 of overhead on $1,200,000 of revenue is 30%. That percentage, plus the net profit you want, is the gross margin your prices need to hit on average.

### How do you add overhead to an hourly rate?

Divide annual overhead by annual billable hours and add the result to your burdened labor cost per hour, then add profit. With $69.23 of overhead per billable hour and $45 of burdened labor, the break-even labor rate is $114.23 before any profit.

### What is a typical overhead percentage for contractors?

It depends heavily on trade, size and how much office staff and marketing you carry, and there's no reliable public average for small trades shops. Calculate yours from your own books. Service companies with CSRs, dispatch and stocked trucks generally carry more overhead per revenue dollar than bid-based install work.

### Is a truck overhead or a job cost?

Most small trades businesses treat trucks as overhead: payments or depreciation, insurance, fuel and repairs. Some allocate fuel or mileage per job. Either works if you're consistent and your pricing covers it.

### Is the owner's salary overhead?

Yes, for the part of your time spent running the business: estimating, sales, scheduling, bookkeeping. If you also work in the field, the field share of your pay is a direct labor cost. Leaving your salary out of overhead makes jobs look more profitable than they are.

### How often should I recalculate my overhead rate?

At least once a year, and any time a big fixed cost changes: a new truck, a new office hire, a move, or a large insurance renewal. Checking it quarterly against billable hours shows whether slow months are pushing your real rate up.

## Related

- [What Is Labor Burden?](https://www.brix.so/learn/labor-burden)
- [What Are Billable Hours?](https://www.brix.so/learn/billable-hours)
- [What Is Net Profit Margin?](https://www.brix.so/learn/net-profit-margin)
- [What Is a Break-Even Point?](https://www.brix.so/learn/break-even-point)
- [What Is Gross Margin?](https://www.brix.so/learn/gross-margin)
- [What Is Job Costing?](https://www.brix.so/learn/job-costing)
- [Overhead Rate Calculator](https://www.brix.so/tools/overhead-rate-calculator)
- [How Much to Charge per Hour as a Contractor](https://www.brix.so/tools/contractor-hourly-rate-calculator)
- [How to Price Contracting Jobs for Profit: The Complete Guide](https://www.brix.so/guides/how-to-price-jobs)
- [Maintenance Agreement Pricing Calculator](https://www.brix.so/tools/maintenance-agreement-calculator)

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Written by BRIX Editorial Team. Last updated 2026-10-12.
Canonical: https://www.brix.so/learn/overhead