There's a reason a lot of contractors stay busy and stay broke at the same time. They bid labor. They bid materials. They might even bid equipment correctly. But they skip overhead — either because they don't know how to calculate it or because they figure it'll sort itself out.
It doesn't sort itself out. Overhead is the silent cost that eats your margin on every single job you run, whether you account for it or not. The only question is whether you planned for it.
What overhead actually is
Overhead is every cost that exists whether you're working or not. It doesn't appear on any job's material list. There's no line item for it in most estimates. But it's real, and it hits your account every month regardless of what your schedule looks like.
Think about what it costs just to keep the lights on in your business:
- Truck payment and insurance — yours and any work vehicles
- Equipment insurance and storage
- General liability insurance
- Your phone bill (business use portion)
- Software subscriptions — estimating tools, invoicing, accounting
- Accounting and bookkeeping costs
- Tools and small equipment replacement
- Fuel for driving to bids, supply runs, and site visits (not job-specific fuel)
- Any shop or yard rent
- Business licenses and continuing education
- Marketing costs — website, yard signs, anything you spend to get work
- Slow periods — the weeks between jobs when fixed costs still run
None of those show up when you're pricing a job. But they're all real, and they all need to be paid from the revenue your jobs generate.
How to calculate your overhead rate
The math is straightforward. Add up all your annual overhead costs, then divide by the number of hours you realistically expect to bill clients in a year. The result is your overhead rate per billable hour — the amount you need to recover from every hour of work you perform.
Let me run through a realistic example for a small excavation operation. These numbers are in the ballpark for a one- or two-truck outfit. Your actual numbers will be different, but this shows the process.
Annual overhead items:
- Truck payment + insurance (2 trucks): $18,400
- General liability insurance: $6,200
- Phone (business use): $1,800
- Software and subscriptions: $1,400
- Accounting / bookkeeping: $3,600
- Tools and small equipment: $2,400
- Fuel (non-job specific): $3,000
- Marketing and miscellaneous: $2,200
- Total annual overhead: $39,000
Now billable hours. Most small operators work around 1,800–2,000 hours a year total but only bill out 60–70% of that time when you factor in drive time, bids, rain days, equipment breakdowns, and the other realities of fieldwork. A realistic billable hour target for a one-man operation is around 1,400 hours annually. If you run a crew of two, maybe 2,600 billable crew hours combined.
Using the one-man example: $39,000 ÷ 1,400 hours = $27.86 per billable hour.
That's nearly $28 you need to recover from every hour of work you bill — on top of your labor cost, material cost, and equipment cost — just to keep the business running without losing ground.
Where this goes in your estimate
Some contractors add overhead as a flat percentage at the bottom of every estimate. Others bake it into their labor rate. Either works — consistency is what matters. Here's the most common approach.
Take your overhead rate per hour and add it to your fully loaded labor cost when you're calculating time. So if your loaded labor rate is $32/hour and your overhead rate is $27/hour, your true all-in cost of having a person on a job is $59/hour. That's what actually needs to be recovered before you start making profit.
When you run a 40-hour job with two people, that's 80 labor hours × $59 = $4,720 just in labor and overhead — before you've written down a single piece of equipment or a single ton of material.
A contractor who's not recovering overhead on that same job is charging for labor at $32/hour × 80 hours = $2,560. They're $2,160 short before they even start. It gets swallowed somewhere — usually in what they thought was profit.
Do this calculation once a year
Your overhead costs change over time. Truck payment ends and a new one starts. Insurance renews at a higher rate. You add software. You move to a shop. Recalculate your overhead rate every January before you set your rates for the year. It takes an hour and it's one of the most valuable financial hours you'll spend.
If your overhead rate is creeping up year over year, that's a signal to look at what's growing. Sometimes it's unavoidable — inflation is real. Sometimes it's costs you've added that aren't pulling their weight. Either way, you want to know, not guess.
The number most contractors never know
I've asked a lot of guys in the trades what their overhead rate is. Most of them don't have an answer. They know what they charge per hour, and they have a general sense that they're making money, but the actual cost of running their business broken down per billable hour — they've never calculated it.
That's the number. Know it cold. Build it into every bid. It's the difference between being busy and being profitable, and those two things are not the same.
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