WHY YOUR CONSTRUCTION OVERHEAD RATE KEEPS CHANGING.
An overhead rate that changes significantly from year to year is telling you something. Either revenue is fluctuating while fixed costs stay constant — which is normal — or fixed costs are creeping up faster than revenue, which is a structural problem. Most contractors cannot tell which one is happening because they have never formally calculated the rate or tracked it monthly. The rate just changes at year-end when the CPA calculates it, and nobody knows why.
Understanding why the overhead rate moves is the first step toward managing it. Once you know the driver — revenue variance, fixed cost creep, or rate calculation errors — the correction is straightforward. What is not straightforward is discovering the problem at year-end when it has already affected every bid you submitted.
WHY CONSTRUCTION OVERHEAD RATES MOVE — AND WHICH CAUSE IS YOURS.
Revenue Fluctuates But Fixed Costs Do Not
Overhead rate is fixed costs divided by revenue. When revenue drops 20% and fixed costs stay constant, the overhead rate increases by 25% automatically. A contractor doing $4M one year and $3.2M the next with the same overhead structure went from 14% to 17.5% overhead rate without changing anything about their cost structure. This is the most common reason overhead rates move. The fix is not to cut overhead — it is to understand that the rate is a function of both sides of the equation and manage revenue and fixed costs together.
Fixed Cost Creep — New Hires, Software, Vehicles
Fixed costs grow incrementally. A new hire in January, a software subscription in March, a new company vehicle in July. Each one adds to overhead. None triggered a bid rate recalculation. By December, overhead has grown by $85,000 and every bid submitted since January was underpriced by the corresponding percentage of that creep. A monthly overhead line item review — comparing actual overhead spend to last month and last year — catches it immediately rather than at year-end.
Owner Salary Changes — Or Was Never Included
Owner salary is the single most commonly missing or misrepresented overhead line item. When the owner takes draws instead of a defined salary, the overhead rate is understated by the difference between the draw amount and market rate compensation ($120K–$180K for most $2M–$8M owner-operators). When the owner gives themselves a raise, overhead increases without a bid rate adjustment. Normalizing owner compensation at market rate consistently every year is the foundation of a stable overhead rate calculation.
Rate Calculated Inconsistently Year to Year
If the overhead rate is calculated differently each year — different line items included or excluded, workers comp included one year and excluded the next — the rate will fluctuate without any underlying change in the business. A stable overhead rate requires a consistent calculation methodology applied the same way every year.
THREE ACTIONS THAT STOP THE OVERHEAD RATE FROM BEING A YEAR-END SURPRISE.
The CEO Report connection: SPM tracks overhead rate as a rolling 12-month metric alongside gross margin and net margin. The delta between gross margin and net margin is your overhead rate performing in real time. When overhead rate trends up month over month, it is visible before it affects every bid in the queue.
FREQUENTLY ASKED.
