What is Considered Overhead in Construction?
Overhead refers to the cost to “keep the roof” over your business’s “head.”
All the expenses you pay for that do not connect directly to a specific job. This can include rent, utilities, software, admin salaries, and marketing expenses etc.. These are the costs to keep the lights on.
The Revenue Illusion
A lot of contractors I speak to tell me they own a “$10 million business” or a "$20 million business”.
But they don’t.
In construction, a huge amount of revenue goes directly towards job expenses. You need to pay for material, subs, and direct labor. This usually leaves 5-10% to cover overhead and make profit.
Too many contractors spend like a business many times their actual size.
Spending too much on software, marketing, and staff that they’re not ready to handle. The large top-line revenue number gets stuck in their heads.
Why It’s Important to Track Overhead
You need to understand your jobs.
Which jobs are making you money, and which jobs are losing you money. This information is critical intel to run your company better, keep the cash flow balanced during off seasons, and put your efforts to scale the company in the right places.
If you are categorizing overhead expenses to specific jobs it can make your margins look worse than they are.
And if you are tying direct job expenses to overhead, it can make bad jobs look more profitable.
You can’t make good decisions with bad data.
Your Overhead Rate
I began by saying overhead keeps the lights on.
If you are not adding overhead to your project bids, you will have jobs that seem profitable when you measure them isolated. But they may actually be draining your profits on a company level.
You need your Overhead Rate.
Every contractor tells me a different number they use for overhead on the bids. Some say their old boss used 10%, others say “the industry standard is 15%”. But they are all wrong.
The right number is unique to each business.
And I’ll show you how to find yours.
Take your Profit & Loss statements from the last 5 years. Add up all the revenue and add up all the overhead expenses. Next, divide your Overhead by Revenue. Now multiply by 100.
(Overhead ÷ Revenue) x 100
For example, say you earned $50 million in revenue, and spent $7 million on overhead.
7,000,000 ÷ 50,000,000 = 0.14
0.14 x 100 = 14
Your Overhead Rate is 14%.
If you add 14% to every bid, you should always have enough to cover overhead.
The Easiest Overhead Test
What do you do if you’re not sure if an expense belongs in overhead or direct?
I teach my clients to use a simple gut check.
The idea is to make this as simple as possible so that when your team is confused they don’t just reach for the easiest box to check, but put it in the right bucket. There’s an unconscious bias to overuse the overhead category to make projects look better. Others have the opposite bias: to tie everything to a job so they look more productive on timesheets.
Neither intends to mislead you; it is simply human nature.
I saw the need for a simple framework.
You need to answer two questions:
Q1: Would I have done this task if this specific project did not exist?
Yes→Overhead
No→Go to Q2
Q2: Who is this for?
Your company/management→Overhead
Client/Job→Direct
The Edge Cases
Let’s look at some samples.
You spent an hour drafting a report on ABC Job.
“Would I have done this task if this specific project did not exist?”
No.
“Who is this for?”
My boss.
Book this as overhead.
Here’s another:
You had an all-hands-on-deck meeting with the team on ABC job.
“Would I have done this task if this specific project did not exist?”
No.
“Who is this for?”
The job.
Book this as a direct cost.
Bringing it All Together
Your overhead rate isn’t a formula you calculate once and forget. Put it into every bid, run your job costing through the two-question test, and you’ll finally bid jobs that actually make you money.
That’s how you keep cash flow steady in the slow seasons, know where to put your energy to scale, and stop running a business off a revenue number that doesn’t mean anything.
