How to calculate overhead cost so every job pays its share
List a year of costs no single job pays for, like rent, vehicles and software, then divide by billable hours. For our two person crew, that comes to $20.93 an hour.
- A two person business worked through step by step
- Per hour or percentage: which method fits your work
- Where overhead and profit sit in the final price
By WhizQuote Editorial · 8 minute read
To calculate overhead cost per hour, add up a year of business costs that are not tied to one job, such as rent, vehicles, insurance premiums, software and office help, then divide by the total billable hours your crew works. In our example, $59,860 of overhead over 2,860 billable hours is $20.93 per hour.
What counts as overhead
Overhead is every cost of running the business that you cannot pin on one particular job. You pay it whether you have five jobs this month or none: the yard, the vehicle running costs, the phone plan, the bookkeeper. Direct costs are the opposite. They exist only because a job exists, such as its materials, its field labor and its dump fees.
Overhead (indirect costs)
- Shop, yard or office rent
- Vehicle fuel, registration, servicing and replacement
- Business and vehicle insurance premiums
- Software, phones and internet
- Accounting and bookkeeping
- Advertising, website and signage
- Tool and equipment replacement
- Office help and the owner’s admin time
Direct job costs
- Materials and supplies for that job
- Field labor for hours on that job
- Equipment rented for that job
- Permit and inspection fees
- Subcontractors
- Disposal and dump fees
A few items can sit on either side. A van used only on one long contract can be a direct cost of that contract. Choose a rule, write it down and keep to it, so nothing is counted twice or missed.
Step 1: list a year of overhead costs
Pull twelve months of bank and card statements and sort every business cost into overhead or direct. Start from last year’s actual spending, then adjust for anything you know will change, such as a second vehicle or a rent increase. The table shows a year of overhead for a two-person repair and remodeling business.
| Overhead item | Per year | Per month |
|---|---|---|
| Vehicles: fuel, registration, servicing, replacement fund | $14,400 | $1,200.00 |
| Office help, part time | $12,000 | $1,000.00 |
| Shop and yard rent | $9,600 | $800.00 |
| Insurance premiums (liability and vehicles) | $6,200 | $516.67 |
| Tool and equipment replacement | $4,500 | $375.00 |
| Advertising and website | $3,600 | $300.00 |
| Accounting and bookkeeping | $3,000 | $250.00 |
| Software and subscriptions | $1,800 | $150.00 |
| Phone and internet | $1,560 | $130.00 |
| Shop consumables | $1,200 | $100.00 |
| Bank and card fees | $1,100 | $91.67 |
| Licenses and memberships | $900 | $75.00 |
| Total overhead | $59,860 | $4,988.33 |
These figures are an example, not a benchmark. Your list will have different lines and different amounts, and that is the point: an overhead rate copied from someone else’s business recovers someone else’s costs.
Step 2: count billable hours across the crew
Overhead is recovered through billable hours, so count only the hours that end up on a customer’s quote or invoice. An owner who quotes, buys and does the books bills far fewer hours than an employee who stays on the tools, so count each person separately and add them up.
| Person | Paid hours | Less leave | Less non-billable | Billable hours |
|---|---|---|---|---|
| Owner | 2,080 | 120 | 660 | 1,300 |
| Employee | 2,080 | 120 | 400 | 1,560 |
| Total | 2,860 |
Non-billable time covers site visits for quotes that never go ahead, supplier runs, vehicle servicing, training and rain days. Measure it from a few months of timesheets rather than guessing, because this number moves the rate more than any single cost line.
Step 3: work out overhead cost per hour
Overhead cost per hour is total annual overhead divided by total billable hours. For this business, $59,860 ÷ 2,860 = $20.93. Every billable hour on a quote has to carry $20.93 of overhead on top of the labor cost of the person doing the work, before any profit is added.
- Annual overhead
- $59,860
- Billable hours
- 2,860
- Overhead per billable hour
- $20.93
- Overhead on a 40 hour job
- 40 × $20.93 = $837.20
Add the rate to labor cost to find your break even hourly cost. If a worker costs $46.67 per billable hour, break even is $46.67 + $20.93 = $67.60 before profit. The guide to calculating labor cost builds that first figure step by step.
Per hour or percentage of cost: choosing a method
You can also spread overhead as a percentage of direct costs. With $310,000 of expected direct costs for the year, $59,860 is 19.31%. Both methods recover the same total over a year, but they share it out very differently between jobs that are mostly labor and jobs that are mostly materials.
| Job | Crew hrs | Direct cost | Per hour method | Percentage method |
|---|---|---|---|---|
| A: deck board and railing repair (labor heavy) | 60 | $3,600 ($2,800 labor, $800 materials) | $1,255.80 | $695.16 |
| B: supply and fit kitchen cabinets (materials heavy) | 12 | $7,200 ($560 labor, $6,640 materials) | $251.16 | $1,390.32 |
On job A the percentage method recovers $560.64 less overhead, even though it ties up the crew for 60 hours. On job B it loads $1,139.16 of extra overhead onto 12 hours of work, which can lose you the job on price. Where most of your cost is time, the per hour method tracks reality more closely.
A blend also works: overhead per hour on labor, plus a modest handling percentage on materials, as described in the materials markup guide. Just make sure the same cost is not recovered by both.
Overhead and profit: putting both into the price
Overhead and profit, often written O&P, are added in order: overhead first, then profit on the total cost. Applying profit after overhead gives a higher price than adding both percentages to direct cost in one step, and it is the version that delivers the profit you planned for.
| Step | Amount |
|---|---|
| Direct job cost | $5,000.00 |
| Overhead at 20% of direct cost | $1,000.00 |
| Total cost | $6,000.00 |
| Profit at 10% of total cost | $600.00 |
| Price | $6,600.00 |
The $600 is 9.09% of the $6,600 price, so a 10% profit applied this way is a markup, not a margin. Adding 30% to the $5,000 in one go would give $6,500 and only $500 of profit. For a true 10% margin, divide the $6,000 by 0.90 to get $6,666.67; markup vs margin explains the difference.
Review the overhead rate every quarter
An overhead rate is only as good as the numbers behind it. Rent goes up, a vehicle is replaced, a new hire changes the billable hours. Recheck the rate every three months against what you actually spent and billed, and update your quoting rates when it moves by more than a dollar or so.
- Compare actual overhead spending with your yearly list.
- Recount billable hours from timesheets, person by person.
- Check that the overhead recovered on invoices matches the overhead you paid.
- Watch slow seasons. If billable hours fall to 2,400, the same overhead becomes $59,860 ÷ 2,400 = $24.94 per hour.
That last point is where underpricing creeps in. Fewer hours means each one carries more overhead, so a quiet spell is the worst time to cut rates. Put the updated figure straight into your next quote, and use the guide to pricing a job to rebuild the full price.
Use your new hourly rate on Labor lines, add Materials, tax and a deposit, then download the PDF.
Overhead mistakes that quietly cost money
Overhead errors rarely show on a single job. They show at year end, when the calendar was full but the bank balance is thin. These are the usual causes, and each one is cheaper to fix in your pricing than to discover later in the accounts.
- Leaving overhead off quotes on the assumption that the markup covers it.
- Dividing by paid hours instead of billable hours, which understates the rate.
- Forgetting the owner’s admin time, or paying it from profit.
- Counting a vehicle in overhead and again as a direct cost on jobs.
- Using a percentage of cost on material-heavy work, then losing those jobs on price.
- Keeping the old rate after adding a vehicle, a hire or a bigger shop.
Overhead questions
What is the formula for overhead cost per hour?
Overhead cost per hour equals total annual overhead divided by total billable hours for the year. In the example, $59,860 ÷ 2,860 hours = $20.93 per hour. Add it to the labor cost of each hour you quote, then add profit.
How do I calculate an overhead percentage?
Divide annual overhead by annual direct costs, or by annual sales, and multiply by 100. $59,860 of overhead against $310,000 of direct costs is 19.31%. Against $420,000 of sales it is 14.25%. Say which base you used, because the two percentages are not interchangeable.
Is the owner’s salary overhead or labor?
Split it. Hours you spend on the tools for customers are labor and belong in your labor rate. Hours spent quoting, ordering and on bookwork are overhead. If you pay yourself $70,000 and spend about a third of your time on admin, roughly $23,333 belongs in overhead.
What does overhead and profit mean on an estimate?
It is the amount added to direct costs to cover running the business and to earn a profit, often shown as one line marked O&P. Some estimates state it as two percentages, such as 20% overhead and 10% profit. Work out what your overhead really is before you copy any percentage.
How often should I recalculate overhead?
At least once a year from your accounts, and ideally every quarter. Recalculate straight away after a change in rent, vehicles or staff, or when billable hours drop, because the rate per hour rises when the same costs are spread over fewer hours.