Running a successful construction business means more than just hammering nails and pouring concrete. You need to know your numbers inside and out – especially your overhead costs.
Many contractors focus on direct job costs but underestimate their overhead, leading to unprofitable projects and cash flow problems. Let’s break down what overhead costs are in construction and how to calculate them properly.
What Are Overhead Costs in Construction?
Overhead costs are expenses that don’t directly tie to specific projects but are essential to running your business. Think of them as the costs you’d still have even if you weren’t working on any jobs.
These costs fall into two main categories:
General Overhead (Indirect Costs)
These are expenses that keep your company running day-to-day:
- Office rent ($2,500/month)
- Administrative staff salaries ($4,800/month for office manager)
- Insurance premiums ($1,200/month for general liability)
- Accounting and legal services ($800/month)
- Marketing expenses ($1,500/month)
- Vehicle payments and maintenance ($950/month per truck)
- Software subscriptions ($350/month for estimating and accounting software)
Job Overhead (Semi-Direct Costs)
These costs support multiple projects but aren’t tied to one specific job:
- Project manager salary ($85,000/year)
- Equipment maintenance ($2,800/month)
- Yard and warehouse expenses ($3,200/month)
- Small tools replacement ($750/month)
- Safety training and compliance ($650/month)
How to Calculate Your Construction Overhead Costs
Step 1: Track All Overhead Expenses
Start by listing every overhead expense from the past 12 months. Be thorough – small costs add up.
Example for a mid-sized framing contractor:
- Office rent: $30,000/year
- Administrative salaries: $57,600/year
- Insurance: $45,000/year
- Phone/internet: $4,800/year
- Software: $6,000/year
- Vehicle expenses: $34,200/year
- Marketing: $18,000/year
- Equipment maintenance: $33,600/year
Total Annual Overhead: $229,200
Step 2: Calculate Your Overhead Rate
Your overhead rate shows how much overhead you need to cover with each dollar of direct labor.
Formula: Overhead Rate = Total Annual Overhead ÷ Total Annual Direct Labor Cost
Example:
- Annual overhead: $229,200
- Annual direct labor: $850,000
- Overhead rate: $229,200 ÷ $850,000 = 27%
This means for every dollar spent on direct labor, you need to account for 27 cents in overhead.
Step 3: Apply Your Overhead to Estimates
Let’s say you’re bidding on a bathroom remodel:
- Direct materials: $12,000
- Direct labor: $8,500
- Subcontractors: $4,000
To cover your overhead:
- Overhead allocation = $8,500 (labor) × 27% = $2,295
Your complete estimate should include:
- Direct costs: $24,500
- Overhead: $2,295
- Profit margin (15%): $4,019
- Total bid: $30,814
Common Overhead Cost Calculation Mistakes In Construction
Mistake #1: Forgetting Owner Salary
If you’re an electrical contractor paying yourself only when money is available, you’re not accounting for your true costs. Include a market-rate salary ($85,000-$120,000) in your overhead.
Mistake #2: Ignoring Depreciation
Your excavation equipment loses value each year. A $120,000 excavator might depreciate $20,000 annually – that’s overhead you need to recover.
Mistake #3: Inconsistent Tracking
Monthly bookkeeping ensures your overhead calculations are based on accurate data. Waiting until tax time means you’re estimating with outdated information.
How Level Accounting & Advisory Can Help
Calculating and managing overhead costs requires consistent bookkeeping and financial oversight. At Level Accounting & Advisory, we specialize in helping contractors:
- Set up systems to track overhead expenses accurately
- Calculate job costs and overhead rates
- Develop pricing strategies that ensure profitability
- Provide monthly financial reports that highlight overhead trends
- Create tax strategies that maximize deductions
Understanding your overhead isn’t just about accounting – it’s about creating a sustainable construction business that remains profitable year after year.
Ready to get a handle on your overhead costs? Contact Level Accounting & Advisory today for a consultation tailored to your construction business.
