YOUR OVERHEAD RATE IS
WRONG BY DESIGN.
Most subcontractors calculate overhead by dividing last year's overhead costs by last year's revenue. That's wrong for three reasons: the revenue base is stale, the cost categories are incomplete, and field costs that belong in job cost get included in overhead. The result is a number that's 5 to 15 points too low — baked into every estimate, compounding on every job you win.
WHY THE CALCULATION IS
STRUCTURALLY BROKEN.
The most common overhead calculation: take last year's overhead costs, divide by last year's revenue. It's fast, it's simple, and it's wrong for three structural reasons that compound on each other.
Industry reality: the standard overhead target is 10%. Most subcontractors are actually running 25–42% without knowing it. That gap — 15 to 32 points — is what the wrong calculation costs you on every job you price and win. See what overhead normalization looks like in practice →
HOW TO BUILD AN OVERHEAD RATE
THAT HOLDS.
BUILD THE FULL COST LIST — NOT JUST THE OBVIOUS ONES
Fixed costs: rent, utilities, lay-down yard, telecom. Staffing: owner salary at market rate, fractional CFO, in-house accounting, admin. Benefits: office staff only — field benefits go to job cost. Software and services: accounting, job costing platform, estimating software, website, IT. Equipment maintenance: general upkeep to overhead, project-specific damage to job cost. Business taxes, dues, and licenses. Scenario plan for the slow season when fixed costs don't drop with revenue.
DIVIDE BY PROJECTED REVENUE — NOT LAST YEAR'S
Use the revenue you expect to do this year — or better, a conservative estimate. If you project $6M and do $4M, your overhead rate was understated. Always better to be slightly conservative on the revenue denominator than to underprice six months of bids.
VERIFY MONTHLY — NOT ANNUALLY
The overhead rate is a CFO-level monthly task. Every time a cost component changes — a new hire, a software subscription, a workers comp renewal — the rate updates before the next bid goes out. The target is 9–13%. When it drifts above 13%, the CFO identifies what moved and whether it's a cost structure problem or a revenue base problem.
