Most small contractors price overhead the way their first boss did: add ten percent and hope. Then the year ends, the truck payments and the insurance renewal and the software subscriptions have eaten the margin, and the jobs that "made 25%" made six. The fix is one number, the overhead rate, and it takes about ten minutes with last year's bank statements. This guide is that ten minutes, plus the bid arithmetic the number changes.
What counts as overhead
Overhead is every cost the business carries whether or not there's a job. The test is simple: if you finished every project tomorrow and won nothing new, what would you still pay next month?
| Overhead (the business exists) | Direct cost (the job exists) |
|---|---|
| Shop or yard rent, storage | Materials delivered to a job |
| Trucks, fuel and repairs not charged to a job | Fuel and mileage billed to a job |
| General liability and vehicle insurance | Permits, dumpsters, rentals for one job |
| Office, phone, software, bookkeeping | Subcontractors on a job |
| Your salary, and any office staff | Crew wages while on a job |
| Marketing, website, licenses, dues | Workers' comp on job hours |
| Tools and equipment you own | Tools bought for and consumed by a job |
| Downtime, training, unbillable hours | Billable labor |
Two lines trip people up. Your salary is overhead, not profit: pay yourself a wage in the overhead column so the margin isn't your paycheck. Crew downtime is overhead: the hours between jobs, the rain days, the trip to the supplier for nothing, are real wages that no job absorbs. The labor burden calculator puts a number on the true hourly cost of a worker once that time is counted.
The two ways to state the rate
Both start with the same total: last year's overhead, added up from the bank statements. Say it's $112,000. The difference is what you divide it by.
Method 1, overhead as a share of revenue. Divide by last year's revenue. On $560,000 of revenue, $112,000 is a 20% overhead rate. This is the version accountants and the NAHB studies use, and the one the overhead and break-even calculator computes.
Method 2, overhead as a share of direct cost. Divide by last year's direct job costs instead. If those were $400,000, the rate is 28%. Estimators like this version because it applies straight to a bid: cost the job, add 28% for overhead, then add profit.
Both are correct; they're the same dollars over a different base. What goes wrong is mixing them: applying a 20% revenue-based rate as a markup on cost under-recovers overhead on every job, for the same reason a 20% markup isn't a 20% margin. The markup vs. margin guide has the conversion table.
Where small contractors actually land
Sourced figures are scarce at the small end, but the ones that exist agree overhead is larger than the folklore 10%:
- NAHB's 2026 Remodelers' Cost of Doing Business Study put operating expenses at 23.6% of revenue for fiscal 2024, on firms averaging $2.7 million in revenue.
- CFMA's benchmarks, summarized by JMCO for 2025, put a healthy overhead target at 8% to 15% of revenue, on firms large enough to have a CFO.
- Industry guides for one-to-five-person residential shops commonly cite 25% to 40% of revenue, because a truck, insurance and an owner's salary don't shrink with the company.
So: a small remodeler at 25% overhead is normal, not bloated. What's abnormal is bidding as if it were 10%.
What the rate does to a bid
The rate sets the gross margin every job must carry. Required gross margin equals the overhead rate plus the net profit you want. At a 20% overhead rate and an 8% net target, bids need a 28% gross margin, which is a 39% markup on cost. At 25% overhead and 10% net, bids need 35% gross, which is a 54% markup.
Worked through on a $40,000 bathroom bid with $30,000 in direct costs, so a 25% gross margin:
| 10% overhead folklore | 25% overhead measured | |
|---|---|---|
| Bid price | $40,000 | $40,000 |
| Direct cost | $30,000 | $30,000 |
| Gross margin | $10,000 (25%) | $10,000 (25%) |
| Overhead the job must carry | $4,000 | $10,000 |
| Net profit left | $6,000, looks great | $0, the truth |
| Price the job needed at 8% net | $36,600 | $44,800 |
The first column is why a shop can be busy all year and broke in January. The job was priced with a 25% gross margin and the business needed 33%. The last row is the price that carries both overhead and an 8% net: direct cost divided by one minus the required gross margin.
Keeping the rate honest through the year
The rate is a photograph of last year. Three habits keep it true:
- Recalculate every January, from the bank statements, not from memory. Insurance and software renew upward; revenue moves.
- Track achieved margin by job, not just bid margin, so you find out mid-year whether the blend is carrying the overhead. That needs every job's costs in one place as they happen, which is what the job costing spreadsheet or Obra is for; the profit margins by trade page has the benchmarks to hold the blend against.
- Watch the break-even line. The overhead calculator gives it to you as monthly revenue: the sales you must close each month, at your gross margin, before the business earns a dollar. A month under the line isn't a slow month; it's a month the overhead came out of savings.
Questions people ask
What percentage should a contractor charge for overhead? Whatever your measured rate is. Sourced averages run from about 15% of revenue for CFMA's larger firms to 23.6% for NAHB's remodelers, and small residential shops commonly run 25% to 40%. The 10% rule of thumb is too low for almost everyone.
Is the owner's salary overhead or profit? Overhead. If you don't put a wage in the overhead column, the "profit" on your bids is your paycheck, and the business itself is earning nothing.
What's the difference between overhead and profit on a bid? Overhead is the share of the price that pays for the business existing; profit is what's left after that. A "10 and 10" bid recovers 10% of price for each; most small contractors need more than 10% for overhead and should measure it before choosing a profit target.
Does overhead include labor? Billable crew hours on a job are a direct cost. Unbillable hours, downtime, training and the owner's time running the business are overhead. Splitting them honestly is most of the work.
Get the template
Use the calculator above for the rate, then the free job costing spreadsheet below to see whether each job's achieved margin actually carries it. One sheet per job, costs and payments kept separate. Enter your email and the download starts right away.