CONSTRUCTION OVERHEAD RECOVERY RATE.
Your overhead rate is the percentage you apply in bids to cover fixed costs. Your overhead recovery rate is how much of your actual overhead you collected through the field. The two numbers are almost always different — and the gap between them is unrecovered overhead that comes directly out of net profit. A contractor bidding at 10% with a real overhead rate of 17% has a 7-point recovery gap. On $4M in revenue, that is $280,000 per year in overhead costs that are not being collected through project billings.
Most subcontractors know their overhead rate in bids. Most have never calculated their actual overhead recovery rate — what the field actually returned against what overhead actually cost. This page covers the calculation, what the gap means, and the two levers that close it.
HOW TO CALCULATE YOUR OVERHEAD RECOVERY RATE.
Calculate Total Overhead Incurred
Pull every fixed cost from the last 12 months — owner salary at market rate, office staff, rent, insurance, software, vehicles, equipment maintenance overhead, marketing, accounting, everything that is not a direct job cost. Add them up. That is your actual overhead incurred. For most $2M–$8M subcontractors this number is $180,000–$600,000 per year depending on revenue size and overhead structure.
Calculate Overhead Recovered Through Billings
Overhead recovered is your bid overhead rate multiplied by your actual revenue. If you bid 10% overhead on $3.5M in revenue, you recovered $350,000 in overhead through project billings. Compare that to your actual overhead incurred. If actual overhead was $490,000 and you recovered $350,000 — you have a $140,000 recovery gap. That $140,000 was covered by reducing net profit below what the P&L suggested.
Calculate the Recovery Rate
Overhead Recovery Rate = Overhead Recovered ÷ Overhead Incurred × 100. In the example above: $350,000 ÷ $490,000 × 100 = 71.4% recovery rate. You recovered 71 cents of every dollar of overhead you incurred through project billings. The other 29 cents — $140,000 — came from net profit or, if margins were not sufficient, from cash reserves or the LOC.
HOW TO CLOSE THE RECOVERY GAP — IN ORDER.
Increase the Bid Overhead Rate to Match Reality
Calculate the real overhead rate using the overhead calculator — total annual fixed costs divided by annual revenue. Apply that rate to every new bid from this point forward. This does not change your existing contracts. It ensures every new contract is priced at the correct overhead rate. The recovery gap on existing work closes as those projects complete and new work priced correctly replaces them. Full recovery typically takes 6–12 months as the backlog turns over.
Reduce Overhead Costs to Match the Rate You Can Actually Bid At
In competitive markets where bidding at a higher overhead rate loses work, the alternative is reducing overhead costs until the real rate matches what the market will bear. Run the overhead calculator, identify the largest discretionary overhead items, and determine which ones can be reduced without affecting field operations. This is the harder lever — cutting overhead requires actual decisions, not just a formula. But it is the right lever when the market will not absorb a higher bid rate.
The CFOS approach: Calculate the real overhead rate first. Then determine whether to raise the bid rate, cut overhead, or both. Most clients do some of both — cut 2–3 overhead items that were not producing value, and raise the bid rate by 3–4 points that the market will absorb without losing work. The combination typically closes the recovery gap within two quarters.
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