Overhead Costs for Contractors: What to Track and How to Calculate Them

Why Overhead Matters So Much

Every hour you work, your overhead clock is running. If you have $6,000/month in overhead and work 150 billable hours per month, you need to recover $40 per billable hour just to break even on overhead — before paying yourself anything.

A common mistake: pricing labor at "what competitors charge" without knowing if that rate covers your specific overhead. A large company with 10 trucks and a full office has very different overhead than a solo operator with one truck and a home office. Their rate might be their minimum survival rate and way below yours.

Understanding overhead isn't just an accounting exercise — it's the foundation of every pricing decision you make. A contractor who doesn't know their overhead rate is essentially guessing at every estimate.

Fixed vs. Variable Overhead

Overhead costs fall into two categories:

Fixed overhead stays the same regardless of how much work you do — insurance premiums, vehicle payments, software subscriptions, rent. These costs run whether you have jobs or not.

Variable overhead scales with your volume — fuel, some marketing costs, additional tool purchases as you grow. Variable overhead is harder to predict but equally important to track.

When calculating your overhead rate, use total overhead (fixed + variable average). Variable costs can be estimated based on prior months' actual spend.

Complete Overhead Cost Checklist

Go through this list and total your monthly cost for each item. Include items even if they're annual — divide by 12 to get the monthly amount.

How to Calculate Your Overhead Per Hour

Example: $5,000/month overhead ÷ 120 billable hours = $41.67 overhead per hour. If you pay yourself or your crew $35/hour in wages, your actual cost per hour is $76.67 before any profit.

Your hourly rate to customers needs to cover: overhead per hour + labor cost per hour + profit margin. Many contractors charge $75–$125/hour in skilled trades — and with high overhead or less-than-full billable schedules, margins are much tighter than they appear.

Real-World Overhead Examples by Business Size

Notice that overhead per hour doesn't necessarily decrease as you grow — it depends heavily on how efficiently you fill your billable hours. A growing company that adds trucks and employees faster than it fills their schedules can actually have a higher overhead rate than a solo operator.

The Billable Hours Problem

Contractors rarely have 100% billable hours. You spend time on:

• • Estimating and bidding (typically 10–20% of time)
• • Material purchasing and delivery
• • Admin, invoicing, collections
• • Drive time between jobs
• • Callbacks, warranty work, and repairs
• • Training, licensing, and downtime

A contractor who works 40 hours/week likely has 25–30 billable hours per week — meaning overhead is divided by a smaller number, increasing the per-hour overhead rate significantly. Calculate based on realistic billable hours, not total working hours.

One of the highest-leverage ways to reduce your effective overhead rate is to reduce non-billable time — specifically admin and estimating. Contractors who use software to cut invoicing from 30 minutes to 5 minutes and estimates from 2 hours to 20 minutes reclaim significant billable time, lowering their effective overhead per hour without spending a dollar less.

Overhead as a Percentage of Revenue

Another way to benchmark your overhead: as a percentage of total revenue. Industry benchmarks for overhead as a percent of revenue:

• • Under 15% — Very lean operation; possible if solo with minimal fixed costs
• • 15–25% — Healthy range for most small-to-mid contracting operations
• • 25–35% — Common as businesses grow and add staff, vehicles, and office costs
• • Over 35% — Warning sign; may indicate underpriced work or overstaffed overhead relative to revenue

If your overhead percentage is high, the fix is either to grow revenue faster than overhead, or to cut fixed costs. Growing revenue is usually the better lever — overhead costs are mostly fixed and don't shrink easily.

How Often to Review Overhead

At minimum, recalculate overhead every 6 months. Review immediately when:

• • You add a vehicle, employee, or equipment
• • Your insurance renews (rates often change)
• • You add a new software subscription or service
• • Fuel or material costs change significantly
• • Your billing volume changes substantially

Many contractors set their overhead once and never revisit it — then wonder why their margins are shrinking. Overhead creep is real. Small additions (a new phone line, a software subscription, higher insurance at renewal) add up to hundreds of dollars per month over time. A contractor who last calculated overhead 3 years ago may be operating on numbers that are 20–30% too low.

Building Overhead Into Your Pricing

Once you know your overhead per hour, building it into estimates is straightforward:

This approach ensures every job covers its share of overhead — not just the ones you happen to price well. Consistent overhead allocation is the foundation of consistent profitability.