Your construction overhead rate should come from your own books. Total the annual overhead from last year's profit and loss, adjust it for the year ahead and divide it by the cost driver your jobs actually consume — usually field labour hours or direct job cost. Recalculate it every year. A flat percentage borrowed from another builder or an old estimator's habit gets applied to every job the same way, so large jobs heavy in materials and subs get overcharged and lose bids, while small labour-heavy jobs carry less than their share and lose money without anyone noticing.

What goes in the overhead pool, and what stays out

Overhead is every cost of running the company that does not belong to one job. The test is simple: if the job disappeared tomorrow, would the cost still be there? If yes, it is overhead. If no, it is a direct cost and belongs in the estimate on its own line.

  • Office and yard rent, utilities and phones.
  • Salaries for estimators, office staff, bookkeepers and project managers who split time across jobs — plus their payroll taxes and benefits.
  • The owner's pay, at what it would cost to hire someone to do the owner's job. Profit is separate and comes later.
  • General liability, umbrella and office insurance not billed to a specific project.
  • Vehicles, fuel and small tools not assigned to a job.
  • Software, accounting, legal fees and licensing.
  • Marketing, and the estimating hours spent on bids you don't win.

Leaving the owner's pay out is the most common error. It makes the rate look low and turns profit into the owner's wages — a company can show a margin every year while the owner works for nothing. The opposite error is double-counting. A superintendent on site full time for one job, a dumpster, permits, a job trailer and builder's risk bought for the project are direct costs. If they also sit in the overhead pool, every job pays for them twice. Keep overhead accounts out of job costing entirely; cost codes designed for the person filling in the timecard make it obvious which bucket a receipt goes in.

Pick the driver your jobs actually consume

The rate is overhead divided by something. That something should be whatever makes the office work harder. Choose the measure that rises when office effort rises.

  • Field labour hours — the right driver if you self-perform most of the work. Crews create payroll, scheduling, supervision and truck time. The rate is a dollar figure per hour, loaded onto the labour rate.
  • Direct job cost — the right driver if you subcontract most of the work. Office effort tracks the money flowing through the job: more subs to manage, more contracts, more invoices, more change orders. The rate is a percentage of direct cost.
  • Split — labour-driven overhead (payroll admin, trucks, small tools) goes on hours and the rest goes on direct cost. More accurate for firms that do both kinds of work, at the price of maintaining two numbers.

Revenue is the wrong denominator. Overhead as a percentage of last year's revenue is the figure most often quoted, and it cannot be applied straight to the costs in an estimate — it is a share of the selling price, not an addition to cost. The same arithmetic problem is why a 20% markup is not a 20% margin. Calculate the rate against the same base you will apply it to.

A worked example: same overhead, two jobs

Take a builder with $480,000 of annual overhead, owner's market-rate pay included. Next year's plan is $4,000,000 of direct job cost, of which 24,000 hours are field labour. These are illustrative numbers — run your own. On direct cost, $480,000 ÷ $4,000,000 is 12%. On labour hours, $480,000 ÷ 24,000 is $20 per field hour. Now price two jobs.

  • Job A, an $800,000 commercial fit-out — mostly subcontracted, 2,000 field hours. At 12% of direct cost it carries $96,000 of overhead. At $20 an hour it carries $40,000.
  • Job B, a $60,000 kitchen and bath remodel — self-performed, 600 field hours. At 12% of direct cost it carries $7,200. At $20 an hour it carries $12,000.

If this builder's office effort really follows crew hours, the flat 12% puts $56,000 too much on Job A and $4,800 too little on Job B. Job A goes to a competitor who priced its overhead correctly. Job B gets won, and so does every job like it. Each one leaks $4,800, and none of them looks like a loser — the job report shows a healthy gross margin on its own lines. The shortfall appears at year-end, spread across the company with no job attached to it. Reverse the business and the logic reverses too: for a builder that subs out nearly everything, an hourly rate would misprice in the other direction. The driver has to match the work.

Why a borrowed percentage fails

A borrowed rule is wrong twice. The numerator is someone else's — their rent, their payroll, their insurance. The denominator is someone else's too — their mix of labour and subs, their volume. A builder with a lean office and a large crew and a builder with three project managers and no crew can both run healthy businesses at very different rates. Apply either one's number to the other's jobs and every bid is mispriced in the same direction. That is worse than random error, because it never averages out.

The rule also hides its own failure. When the percentage is just what everyone uses, a bad year gets blamed on the market, the weather or a sub who walked off. The rate never gets questioned because nobody ever calculated it. A construction overhead rate built from your own profit and loss can be checked against your own results, which is the whole point of having one.

Recalculate every year, then check it every quarter

Overhead moves. An insurance renewal, a new estimator, a second truck or a bigger yard changes the numerator. Volume changes the denominator, and that is the one that catches builders out.

If next year's plan is 18,000 field hours instead of 24,000 and overhead holds at $480,000, the rate is $26.67 an hour, not $20. Bid the year at last year's $20 and work 18,000 hours, and $120,000 of overhead goes unrecovered. A higher rate may cost bids in a slow year. When it does, the problem is the size of the office relative to the volume, not the rate — the rate is just reporting it. Cut overhead or raise the rate. Doing neither is a decision to absorb the difference.

Set the rate once a year, after the year-end close, from the profit and loss your accountant signs off and the volume you actually plan to win. Then check it each quarter by comparing overhead recovered through jobs with overhead actually spent. Budget vs. actual on each job shows what the jobs recovered; QuickBooks shows what the company spent. BuilderSolve reads QuickBooks one way, so QuickBooks stays the book of record and the comparison runs against the same numbers your accountant uses. A gap after two quarters is the signal to recalculate mid-year rather than wait.

Where the rate lives in the estimate

Put the rate where an estimator cannot forget it. For an hourly rate, load it into the labour rate itself — a carpenter who costs $48 an hour in wages, burden and insurance becomes $68 with overhead. For a direct-cost rate, carry it as its own line below the direct cost subtotal and above profit, so overhead and profit stay separate and each can be checked.

With line-item estimating on a shared rate library, the loaded rate sits in one place and every estimate pulls the same number, so nobody bids this year's jobs at last year's rate from an old spreadsheet. The software does not calculate your overhead rate. That number comes from your books and your plan. If BuilderSolve's estimating team is building your takeoffs and budgets, they bid at the rate you set — they do not pick one for you.

Change orders need the rate as well. A change order priced at bare cost plus profit leaves the office time it consumed — pricing, paperwork, rescheduling and billing — unpaid. Apply the same overhead rate to change order work that you apply to the base bid, and note it in the change order so the client sees a consistent method rather than a number that moves.

What to do this week

  1. Pull last year's profit and loss. Separate every overhead account from job costs and move any job-specific cost out of the pool.
  2. Add the owner's pay at a market rate if it isn't already there.
  3. Adjust for known changes next year: renewals, hires, leases, vehicles.
  4. Pick the driver — labour hours if you mostly self-perform, direct cost if you mostly sub, both if you do both.
  5. Divide by next year's planned volume, not last year's actual.
  6. Load the rate into every estimate and every change order, then check recovered against spent at the end of each quarter.

Common questions

what is a good overhead rate for a construction company

There isn't one that transfers between companies. The right rate is your own annual overhead divided by the cost driver your jobs consume — field labour hours or direct cost. Two healthy builders can run very different rates because one has a large crew and a lean office and the other has the reverse. A number borrowed from another firm misprices your jobs in the same direction every time.

how to calculate construction overhead rate

Total next year's expected overhead — everything the company spends that isn't tied to one job, including the owner's pay at a market rate — and divide it by planned field labour hours or planned direct job cost. In a worked example, $480,000 over 24,000 hours is $20 an hour, and over $4,000,000 of direct cost it is 12%. Use whichever driver tracks the office effort a job takes.

should overhead be allocated on labor hours or direct cost

Labour hours if you self-perform most of your work, direct cost if you subcontract most of it. The driver should rise when office effort rises: crews create payroll, scheduling and supervision work, while subcontracts create contracts, invoices and change orders. Builders who do both can split the overhead pool and apply part of it to hours and the rest to direct cost.

how often should a contractor update its overhead rate

Every year, after the year-end close, using the signed-off profit and loss and next year's planned volume. Check it quarterly by comparing overhead recovered through jobs with overhead actually spent. Recalculate sooner if something large changes mid-year — a key hire, a new lease or a drop in volume — because the rate moves with both total overhead and the hours or cost it is spread across.

is overhead the same as markup in construction

No. Overhead recovery covers the cost of running the company, and profit is what is left after it. Markup is the total added to direct cost to cover both. Pricing that rolls overhead and profit into one markup figure can't show whether a job failed to recover its office costs or simply earned a thin profit, so keep them as separate lines in the estimate.