Most subcontractors set their overhead rate once and never touch it again. The business grew. The overhead grew with it. The rate in the bids did not. Here is how to fix it.
Most contractors set their overhead rate once — usually when they first started bidding — and never revisit it. The business grew, fixed costs grew with it, and the rate in the bids never kept up. Now every job is underpriced by the difference.
If your overhead rate in bids is 8% and your actual overhead is 15%, you are funding 7% of overhead from what you thought was profit on every job. On a $500K job that is $35,000 in overhead not covered by the bid. On $4M in annual revenue that is $280,000 per year disappearing with no obvious explanation.
These items are overhead. Most contractors do not treat them that way:
Go through your P&L and pull every expense that runs regardless of job volume. Every month, whether you win work or not, these costs hit. Add them all up for the trailing 12 months.
If you are taking a salary, draw, or distribution, that is overhead — not profit. Include it. Most owner-operators significantly undercount overhead because they do not include what it costs to have themselves in the business.
Overhead ÷ Revenue = Overhead Rate. Use your direct construction billings — not gross revenue if you are pass-through billing materials separately.
If this number is more than 2–3 points higher than what is in your bids, every job you have won recently was underpriced. The correction goes into the next bid — and every bid after that.
Do not negotiate your overhead rate away to win work. That is how the problem restarts. If a job does not pencil at your real overhead rate, it is not a profitable job.
Based on SPM client data across 50+ subcontractors at $1M–$12M revenue.
| Trade | Healthy Range | Common Mistake Rate | Impact at $5M Revenue |
|---|---|---|---|
| Civil | 12–18% | 6–8% | Up to $500K/yr at $5M |
| Concrete | 10–16% | 5–8% | Up to $400K/yr at $5M |
| Electrical | 14–20% | 8–10% | Up to $500K/yr at $5M |
| Erosion Control / SWPPP | 10–15% | 4–7% | Up to $400K/yr at $5M |
| Underground Utility | 12–18% | 7–9% | Up to $450K/yr at $5M |
| Masonry | 12–17% | 6–8% | Up to $450K/yr at $5M |
| Mechanical | 14–20% | 8–10% | Up to $500K/yr at $5M |
| Plumbing | 13–19% | 7–9% | Up to $500K/yr at $5M |
Rates decrease as revenue increases due to overhead leverage. Individual rates vary based on owner compensation structure, fleet size, and fixed cost base.
This contractor had been using a 5% overhead rate in bids for years — the default in his estimating software. His actual overhead, including his own compensation, equipment costs, office staff, and insurance, was 12%. Every job he won was underpriced by 7 points.
Overhead rate corrected in the bid model within the first 60 days of engagement.
In profit sharing paid to the team in the following 12 months — a direct result of margin that was always there once overhead was correctly priced in.
A free call with Josh takes 30 minutes. Bring your last P&L and current bank balance. The gap between those two numbers is where we start.
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