OVERHEAD ABSORPTION, AND THE BASIS YOU PICK.
Your overhead rate is how much overhead you carry. Overhead absorption is how you spread it across jobs, and it's a separate decision. Most subcontractors absorb on revenue because revenue is the easiest number to divide by, and for a labor driven trade that's the worst of the five choices: it loads overhead onto material heavy jobs that consume almost none of your office, and it under-loads the labor heavy jobs that consume all of it. The rate can be right to the decimal and the job costing still can't tell you which work to chase.
Two subcontractors can carry identical overhead, bid identical rates and read opposite conclusions from the same portfolio, because one divides overhead by revenue and the other divides it by field labor hours.
WHAT IT MEANS.
Overhead absorption is the method by which company overhead is applied to individual jobs, set by the basis it's divided across: revenue, direct labor hours, direct labor dollars, total direct cost, or equipment hours.
This is the second half of an overhead decision, and the half almost nobody makes on purpose. The first half is the size of the rate, which is total fixed cost over projected revenue, and every page on this site about overhead is about that number. The second half is what the rate rides on when it reaches a job. Choose revenue and every job absorbs overhead in proportion to what it bills. Choose direct labor hours and every job absorbs in proportion to how much of your crew and your supervision it consumed. Those two produce different job margins from the same set of jobs, and only one of them describes what your overhead is really spent on.
WHERE THE BASIS MISREADS THE WORK.
Revenue absorption on a labor driven trade
A concrete sub runs two jobs at $500,000 each. One is a flatwork pour with $300,000 of material and a small crew for three weeks. The other is a formed structural job with $120,000 of material and a full crew for eleven weeks. Absorbed on revenue, both carry the same overhead dollars. Absorbed on field labor hours, the structural job carries roughly three times as much, which is closer to the truth: it consumed three times the supervision, three times the payroll processing, three times the truck movements and three times the safety administration. Priced and reviewed on the revenue basis, the flatwork job looks worse than it's and the structural job looks better, so the estimator chases the wrong work.
Equipment overhead absorbed on labor
An excavation contractor with $1.4M of iron absorbs all overhead on labor dollars. A trench and lay utility job with a four man crew and one mini excavator absorbs a full share; a mass grading job with two operators, a dozer, a scraper and an excavator absorbs almost nothing, because two operators aren't much payroll. The second job is consuming the fleet, the shop, the mechanic and the fuel card, and the job cost report says it's the cleaner of the two. This is the single most common reason an equipment heavy contractor can't work out why a busy season produced no net profit.
One basis for a company running two kinds of work
Service and new construction inside one entity almost never share an absorption basis honestly. Service work is dispatch, small tickets, high truck utilization and high administrative load per dollar billed. Project work is few tickets, large dollars, low administrative load per dollar. A single basis across both moves overhead from the side that consumes it to the side that doesn't, and it always moves in the same direction: service subsidises projects, or projects subsidise service, depending on the basis, and never neither.
The basis is never revisited after the company changes
A basis chosen when a company was five people doing $1.2M of labor only work is still in place at $6M with three crews, a shop and eight trucks. Nothing about it was wrong when it was set. It stopped describing the business at about the point the first piece of owned equipment showed on the books, and there's no report anywhere that flags a stale absorption basis, because the arithmetic keeps working. It produces a number every month. The number is simply about a company that no longer exists.
WHAT IT LOOKS LIKE IN DOLLARS.
Overhead applied as a percentage of what the job bills. The only correct choice when your overhead genuinely scales with billing rather than with activity, which in practice means a broker or a pure management contractor. For a self performing subcontractor it's the default because it's the easiest to set up. Test it this way: if two jobs of equal contract value consume visibly different amounts of your office, your trucks and your supervision, revenue is the wrong basis.
Overhead divided by total field hours, applied per hour worked. The best fit for most labor driven trades: drywall, framing, electrical rough-in, flooring, insulation, painting and interior work. It ties overhead to the thing that generates most of it, since supervision, payroll administration, safety, per diem administration and truck movement all scale with crew hours rather than with dollars billed. It also gives an estimator a number he can use directly, because a bid is built in hours before it's built in dollars.
Overhead as a percentage of burdened labor cost. Behaves like the hours basis with one important difference: it charges a journeyman job more overhead than an apprentice job for the same hours. That's right where administrative load follows wage rate, which it does under prevailing wage and certified payroll, and wrong where it doesn't. On a mixed shop under Davis-Bacon this basis is usually the better of the two, because the compliance burden really is heavier on the higher classifications.
Overhead as a percentage of labor plus material plus equipment plus subcontract. The right answer for a trade where purchasing and logistics are a genuine part of the office load: mechanical, structural steel, glazing and anything with long lead procurement. It charges the material heavy job for the buyout work, the expediting, the storage administration and the submittal churn that a material heavy job really does create. It's the wrong answer for a labor trade, where it does the same thing revenue absorption does.
Fleet and shop overhead divided by metered hours and charged per hour of machine use, with the rest of overhead on labor. This is a dual basis, and it's the honest answer for civil, excavation, grading, paving and utility contractors. It also means the equipment cost basis stops living in overhead at all, which is the single change most likely to make a heavy contractor's overhead percentage stop climbing every year.
Take your last twelve completed jobs. Compute each one's margin twice, once on your current basis and once on the basis you think fits the work. Sort both lists. If the order changes, your current basis has been ranking your own jobs wrongly, and every estimating decision made off that ranking has been made on a mislabelled list. If the order holds, the basis is fine and the overhead conversation belongs on the rate instead.
THREE STEPS, AND NONE OF THEM TOUCH THE RATE.
Take the eight overhead categories and ask of each one what drives it. Office salaries and payroll administration follow headcount and crew hours. Shop, yard, fuel and mechanic time follow equipment hours. Purchasing, expediting and submittals follow material and subcontract dollars. Insurance follows payroll for workers compensation and follows revenue for general liability, so it splits. Write the driver next to every category before choosing anything. The basis that fits is the driver carrying the most overhead dollars, and where two drivers are both large, that's the argument for a dual basis rather than a compromise.
A basis is only useful when both sides use it. If estimating applies overhead per labor hour and the job cost report applies it as a percentage of revenue, every job shows a variance that's a reporting artefact rather than a result, and after two months nobody trusts either report. The change is one decision applied in two systems on the same day, which is why it belongs at a month end and not mid month.
The same overhead dollars over a different denominator is a different percentage. Fifteen percent of revenue on $6M is $900,000; the same $900,000 over 58,000 field hours is $15.52 per hour. Neither figure is more or less conservative than the other and swapping them without recomputing is how a company accidentally bids at half its overhead. Recompute, then compare the new job margins to the old ones, and expect the ranking of your work to move. That movement is the whole point of doing this.
FLAT MONTHLY FEE. NO SURPRISES.
Three tiers, priced by your trailing twelve month revenue. Which one you're in depends on how much of the work you want off your desk. No hourly billing, no payroll, and no add-ons.
Pricing
| Last 12 months revenue | Monthly fee |
|---|---|
| Up to $1M | $1,900 to $2,900 |
| $1M to $3.5M | $2,600 to $3,900 |
| $3.5M to $6.5M | $3,800 to $5,700 |
| $6.5M to $9.5M | $5,100 to $7,100 |
| $9.5M to $12.5M | $6,100 to $8,500 |
| $12.5M to $15.5M | $7,400 to $11,000 |
| $15.5M to $18.5M | $9,400 to $13,500 |
| $18.5M+ | Quoted individually |
Range reflects the three tiers below. Which one you're in depends on how much of the work you want off your desk. No payroll. No hidden line items.
You stop guessing.
You get the CFO work. Job costing built against the way you estimate, a 13 week cash forecast, monthly WIP, and a meeting every month that ends in decisions rather than a report.
Your bookkeeper keeps doing the books.
You stop touching the books.
Everything in Core, and we run the bookkeeping and the controllership as well. Nobody in your office is answering coding questions or chasing a reconciliation at month end.
We do the books. No payroll.
Every job shows its margin while it's still running.
Everything in Executive, plus the job costing and WIP platform set up, loaded with your cost codes, and managed for you every month. You never have to learn it.
We do the job costing.
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