Overhead Rate Calculator
By BRIX Editorial Team · Updated
An overhead rate shows how much indirect cost each dollar of revenue, labor or billable hour has to carry. Add up a year of costs that aren't tied to one job, then divide by revenue, direct labor cost or billable hours. A shop with $260,000 of overhead on $1,000,000 of revenue runs a 26% overhead rate.
- Total annual overhead
- $260,000
- Overhead per month
- $21,667
- Overhead per billable hour
- $40.00
- Overhead as % of direct labor
- 65.0%
Every job has to give up 26.0% of its price, or $40.00 per billable hour, before it earns a dollar of profit. Your biggest line is office and admin wages at 27% of overhead.
Key takeaways
- Overhead rate = total overhead ÷ allocation base (revenue, direct labor cost, or billable hours).
- Overhead is every cost you'd still pay if you had no jobs this week: rent, office pay, insurance, trucks, software, marketing.
- Use % of revenue in your pricing formula and $ per billable hour in your hourly rate.
- Pull the numbers from last year's P&L, then adjust for known changes like a new hire or a rent increase.
What counts as overhead for a contractor?
Overhead is any business cost that doesn't belong to one specific job. If you'd still pay it during a week with zero jobs on the board, it's overhead. Materials, field labor on a job, permits and subcontractors are direct job costs; everything else is overhead. See overhead for the full definition.
| Overhead (indirect) | Direct job cost |
|---|---|
| Shop or office rent, utilities | Materials and parts installed on the job |
| Office manager, dispatcher, CSR, bookkeeper pay | Field labor hours on the job (burdened) |
| General liability, commercial auto, umbrella insurance | Permits and inspection fees |
| Truck payments, fuel and repairs (unless charged per job) | Subcontractors |
| Software, phones, internet | Equipment rental for that job |
| Marketing, ads, lead fees, website | Dump and disposal fees |
| Accountant, legal, licenses, bank and card fees | Job-specific travel or per diem |
| Owner pay for time spent running the business | Owner pay for hours worked on the job |
Overhead % = O ÷ R Overhead per hour = O ÷ H Overhead % of labor = O ÷ L
- O
- total annual overhead
- R
- annual revenue
- H
- annual billable hours (all techs)
- L
- annual burdened direct labor cost
How to calculate your overhead rate
- 1
Pull last year's profit and loss statement.
Your P&L separates cost of goods sold (job costs) from operating expenses. Operating expenses are most of your overhead.
- 2
Move anything misfiled.
Field wages booked as an expense belong in job cost; office wages booked in cost of goods sold belong in overhead. If your categories are a mess, fix the chart of accounts first.
- 3
Adjust for this year.
Add a planned hire, a new truck payment, a rent increase or a bigger ad budget. Overhead is forward-looking when you price.
- 4
Pick your base and divide.
Divide by revenue for a pricing percentage, by billable hours for an hourly rate, or by direct labor cost if your trade bids on labor.
Which overhead rate should you use?
| Base | Formula | Best for | Use it in |
|---|---|---|---|
| % of revenue | Overhead ÷ revenue | Pricing any job, fixed bids | Job pricing calculator |
| $ per billable hour | Overhead ÷ billable hours | Labor-heavy service work, hourly and flat-rate | Contractor hourly rate calculator |
| % of direct labor | Overhead ÷ direct labor cost | Trades that estimate on labor hours | Bid sheets and estimating spreadsheets |
Where overhead piles up, by trade
The categories are the same everywhere, but the weight shifts. Use this to sanity-check which lines in your own books deserve a closer look.
| Trade | Lines that tend to run large | Why |
|---|---|---|
| HVAC | Office staff, marketing, vehicles | CSRs and dispatchers for seasonal call spikes; stocked service vans |
| Plumbing | Vehicles, on-call pay, marketing | Emergency work means trucks and techs on standby nights and weekends |
| Electrical | Insurance, licensing, vehicles | Licensing, continuing education and liability coverage for code work |
| Roofing | Insurance, sales commissions, marketing | High-risk work and storm-driven lead buying |
| Landscaping | Equipment, yard rent, vehicles | Mowers, trailers and a yard to park them, plus seasonal idle months |
| Cleaning | Office wages, supplies, turnover costs | Low tickets mean scheduling and hiring costs weigh heavily per job |
Common overhead mistakes
- Leaving out the owner. If you spend half your week quoting, scheduling and doing books, half of a fair wage for you is overhead.
- Using revenue from a record year. A big year makes your overhead percentage look small. Price on a normal year, or the slow season will catch you.
- Mixing truck costs. Either charge trucks to jobs or count them as overhead. Doing both double-counts; doing neither drops them.
- Treating overhead as fixed forever. Overhead grows in steps: a new office hire, a second location. Recalculate when one lands.
- Ignoring overhead in discounts. A discount comes out of profit, not out of overhead. The rent is the same either way.
Once you know your overhead, find how many jobs you need to cover it with the break-even calculator.
Frequently asked questions
How do you calculate overhead rate?
Add up a year of indirect costs, everything that isn't materials, field labor or other job-specific costs. Divide by your allocation base: revenue for a percentage, billable hours for a dollar-per-hour rate, or direct labor cost for a labor-based rate.
What is a good overhead percentage for a contractor?
There's no single right number; it depends on your trade, size and how you book costs. What matters is that your gross margin is bigger than your overhead percentage by at least your profit target. A shop with 26% overhead that wants 10% profit needs gross margins of 36% or more.
Is owner salary part of overhead?
Pay for the time you spend running the business (selling, scheduling, books) is overhead. Pay for hours you work on jobs is direct labor. Leaving both out makes your prices look profitable when they only work because you're working for free.
Are trucks overhead or job cost?
Either works if you're consistent. Service shops whose trucks go to every job usually find overhead simpler. Contractors who run equipment-heavy jobs can charge an hourly equipment rate to each job instead, and leave it out of overhead.
How often should I recalculate overhead?
At least once a year from your full-year P&L, and whenever a big fixed cost changes: a new hire, a new lease, a new truck payment. While growing fast, check it every quarter.
How do I lower my overhead rate?
Either cut fixed costs or spread them over more revenue and billable hours. Filling idle tech hours often moves the rate more than trimming software or office costs, because overhead stays the same while revenue climbs.
Related
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