Here's how it happens: you grow from $2M to $4M over three years. Along the way you hire a project manager, add a truck, upgrade insurance, get better software, move to a bigger office. Each one felt justified — because it was. But your total overhead went from $240K to $680K. Your overhead rate went from 12% to 17%.
The problem: you're still pricing jobs at a 12% overhead allowance. Every single job has been shipping with a 5-point margin deficit — built in before the first crew hits the site. At $4M revenue, that's $200,000 of margin given away per year to overhead that's never recovered.
The math is unforgiving: A $500K job priced at 12% overhead allowance generates $60K to cover overhead. If your actual overhead rate is 17%, that job needs $85K to break even on overhead — before any net profit. You're $25K in the hole on overhead before the first piece of equipment turns a key.
Not last year's. Not an estimate. Pull every SG&A line item for the last 12 months and divide by total revenue. That's your actual overhead rate. If you haven't done this in the past 90 days, the number you're pricing from is wrong. Use the overhead rate calculator to run the math right now.
Every bid that goes out before this is fixed locks in the loss. Update your bid markup to reflect your actual overhead rate plus your target net profit margin. If your overhead rate is 17% and you want 6% net profit, your total cost uplift is 23% — meaning $1.00 of direct cost needs to bill at $1.30 to deliver the right margin. Not $1.18 from two years ago.
Most overhead rate creep comes from 2–3 specific line items. A PM salary that was added mid-year and never reflected in estimating. A vehicle fleet that doubled. Insurance that repriced at renewal. Go line by line through your SG&A and find the items that grew fastest as a percentage. For each one, either build it into bid pricing explicitly or decide it needs to be eliminated.
$240K in SG&A. Bid markup built for 12% overhead recovery. Net margin: 8%. Owner takes home roughly $160K. Business feels healthy.
$450K in SG&A. Bid markup still set for 12%. 3 points of margin on every job goes unrecovered. Net margin: 5%. Owner notices the squeeze but blames job problems.
$680K in SG&A. Bid markup still set for 12%. 5 points unrecovered on every job. Net margin: 3%. Revenue doubled. Take-home dropped. The problem isn't the jobs.
The most common cause is overhead rate creep — indirect costs growing faster than revenue, with bid markup that wasn't updated to match. The business is busier, the owner is working harder, and the take-home is smaller because every job is shipping with an overhead recovery shortfall built in.
It's the gradual accumulation of indirect costs — additional staff, vehicles, insurance, software — that outpaces revenue growth. A contractor who was at 12% overhead two years ago may be at 18% today without recalculating it. The bid markup hasn't changed. The overhead has. The margin disappears on every job.
Three steps: calculate your actual current overhead rate (actual SG&A ÷ actual revenue), update your bid markup to recover the current rate plus target net margin, and identify the 2–3 line items that drove the creep fastest. Most contractors find the culprits in 30 minutes of focused SG&A review. Use the overhead rate calculator as the starting point.
The overhead rate is the answer. Let's find it and fix it.
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