How to Calculate Overhead Rate for a Construction Business
I’m going to say something that will annoy some people in the trades: the 10-10 rule is why contractors go broke while staying busy.
Ten percent overhead, ten percent profit, mark everything up 20%. It’s been repeated at trade shows for thirty years. And for the average specialty trade contractor doing $1M–$15M, the overhead half of that rule is off by a factor of two.
Your real construction overhead rate is probably somewhere between 18% and 30%. If you’re pricing like it’s 10%, every job you win is quietly funded out of your own pocket.
Here’s how to find your actual number.
What counts as overhead in a construction business?
Overhead is every cost that keeps the company running whether or not a crew works today.
Overhead (indirect):
- Office rent, shop, utilities
- Office and admin salaries — dispatcher, office manager, bookkeeper
- Your salary, if you’re running the company rather than producing field hours
- General liability, umbrella, bonding
- Software — accounting, dispatch, estimating, project management
- Marketing, website, truck wraps, lead fees
- Accounting, legal, professional fees
- Vehicles not assigned to a job
- Office supplies, phones, bank and merchant fees
- Loan payments and interest
Not overhead (direct job cost):
- Materials installed on a job
- Field labor and its burden
- Subcontractors
- Equipment rental for a specific job
- Permits and disposal for a specific job
The line between these two matters more than contractors expect. Miscode burden into overhead and your gross margin looks fantastic while your net collapses — and you’ll spend a year trying to fix the wrong problem.
How do you calculate your construction overhead rate?
Construction overhead rate = (Total annual overhead ÷ Total annual revenue) × 100
An electrical contractor doing $2.8M:
| Overhead item | Annual |
|---|---|
| Owner salary | $130,000 |
| Office manager and dispatcher | $96,000 |
| Shop and office | $48,000 |
| Insurance (GL, umbrella, auto) | $37,000 |
| Software and technology | $14,000 |
| Marketing | $52,000 |
| Professional fees | $29,000 |
| Unassigned vehicles and equipment | $44,000 |
| Office supplies, phones, fees | $18,000 |
| Total overhead | $468,000 |
$468,000 ÷ $2,800,000 = 16.7% overhead rate
That contractor is in decent shape. But notice what happens if revenue drops to $2.2M and overhead doesn’t move: the rate jumps to 21.3%. Overhead doesn’t shrink when the work does. That’s the whole reason slow quarters hurt so much more than they seem like they should.
How do you build overhead into your pricing?
This is where the arithmetic gets contractors in trouble, so go slow here.
If your overhead is 20% of revenue and you want 15% net profit, then direct costs can only be 65% of the price. To get there you divide, you don’t add:
Price = Direct cost ÷ 0.65
A job with $10,000 in direct costs needs to be priced at $10,000 ÷ 0.65 = $15,385.
Now watch what happens if you “add 35%” instead: $10,000 × 1.35 = $13,500. That’s a $1,885 shortfall on one job, and you’d swear you priced it right.
Markup and margin are not the same thing, and the gap widens as your percentages go up. Get this backwards on every bid and you can run a busy, well-managed, growing company straight into the ground.
What is a normal construction overhead rate?
Ranges we typically see with specialty trade contractors:
- Lean service operations — owner still in the field, minimal admin: 12–18%
- Established specialty trades — office staff, dispatch, marketing spend: 18–25%
- Companies in a growth push — new hires ahead of revenue, new space, heavy marketing: 25–32%
Higher isn’t automatically bad. A contractor at 26% overhead with a real sales operation and dispatch capacity may be far more profitable than one at 14% who’s still answering the phone from a ladder. What matters is that the number is deliberate and priced for.
What’s not fine is not knowing. If your overhead is 24% and you’re bidding on the 10-10 rule, you’re losing 14 points on every job.
What do you do when your overhead rate is climbing?
Overhead creep is slow and it’s made of individually reasonable decisions. The coordinator you hired. The bigger shop. The software subscriptions nobody has canceled since 2023.
On $5M in revenue, every point of overhead is $50,000.
Track the percentage monthly. When it climbs two months running, you’ve got three options and only three:
- Grow revenue into it — the hire was ahead of the work, and now the work has to show up
- Cut the cost — while it’s still one decision instead of five
- Raise prices — spread the same overhead over higher-value work
The worst option is the automatic one: absorb it into margin and hope volume fixes it. That’s the exact path from a profitable company to a busy but not profitable one.
How often should you recalculate your construction overhead rate?
Monthly as a percentage of trailing revenue, and a full rebuild once a year when you set pricing.
Do the annual one before bid season, not after. Contractors who recalculate overhead in November and reprice for the coming year are the ones whose margins hold. The ones who recalculate in July, after they’ve already committed to a season of work, get to watch the problem happen without being able to stop it.
Frequently asked questions about construction overhead rate
What is a good overhead percentage for a construction company? Most specialty trade contractors run 18–25%. Lean, owner-operated service companies can be 12–18%. If you’re above 30%, either revenue is too low for your cost structure or you’ve hired ahead of the work.
Is the 10-10 rule accurate? Rarely. Ten percent overhead is far below what most contractors actually carry once office staff, insurance, marketing, software, and owner salary are counted. Use your own numbers.
What’s the difference between overhead and labor burden? Burden is the cost of employing a specific field employee — taxes, comp, benefits, truck. Overhead is the cost of running the company. Burden belongs in job cost; overhead doesn’t.
Should my salary be in overhead? If you run the company — estimating, managing, selling — yes. If you’re producing billable field hours, that portion belongs in job cost. Many owners split across both.
How do I add overhead to a bid? Divide direct costs by (1 − overhead % − profit %). With 20% overhead and 15% profit, divide direct costs by 0.65. Adding 35% instead underprices the job.
If your chart of accounts doesn’t cleanly separate overhead from job cost, none of these numbers will be right.
That’s usually the first thing we fix. Level Accounting works with specialty trade contractors doing $1M–$15M.
Book a call at https://levelaccountingfirm.com/book-a-call.
