Overhead: The Invisible Line Item That Eats Businesses

What overhead is — the pause test

Overhead is every cost you cannot honestly charge to a specific job or sale. The test: if you paused all work for a month, which bills would still arrive? Rent and utilities, insurance, vehicles used across jobs, office staff and bookkeeping, software, marketing, licenses, loan interest — and the management share of your own pay. (Your tool-belt hours are direct labor; your estimating and running-the-company hours are overhead. Splitting your pay wrong distorts both this number and your labor burden.)

The two recovery forms

Overhead is recovered by attaching it to the thing you sell. Two forms, one rule:

Per billable hour = Annual overhead ÷ Annual billable hours — for businesses that sell time. Billable means billable: estimating, driving, and admin hours don't count, which is why the honest denominator is smaller than you think.

Percent of revenue = Annual overhead ÷ Annual revenue — for businesses that price jobs or products; it becomes the overhead term in the pricing division (see How to Price a Job).

The rule: use one form per price, never both. Overhead folded into the labor rate and added as a bid percentage double-charges — quietly inflating quotes and losing work for a reason you'll never spot in any single bid. The Overhead Recovery Calculator computes both forms.

Worked example

A contracting company's year of overhead: $96,000 (office, two trucks, insurance, the owner's management salary, advertising). Its crews bill 3,200 hours; revenue is $480,000.

• Per billable hour: $96,000 ÷ 3,200 = $30/hour. A crew hour whose burdened wage cost is $40 truly costs $70 before a cent of profit. Quote crew time at $65 and the company loses $5 on every hour — and the busier it gets, the more it loses. That sentence is the whole pathology of unrecovered overhead: activity without recovery accelerates the starvation.
• Percent of revenue: $96,000 ÷ $480,000 = 20%. Every job must hand over a fifth of its price just to keep the company standing — before materials, labor, and profit split the rest.

The two levers — and the one people forget

When the number shocks, the reflex is cost-cutting, and trimming genuinely idle overhead is real money. But look at the denominator too: utilization. The same $96,000 spread over 3,800 billable hours instead of 3,200 is $25.26/hour instead of $30 — a 16% reduction in the overhead toll without cancelling anything. More billable hours, higher revenue per structure, means every price carries a lighter invisible load. Revenue growth into a fixed overhead base is margin expansion, mathematically — which is also why premature overhead (the bigger shop, the extra truck "we'll grow into") is so dangerous: it raises the toll on every existing sale immediately, in exchange for capacity you don't yet bill. Check any planned addition against your break-even number before signing.

Where this math goes wrong

• Flattered billable hours. Use last year's actual billed hours, not a hope. Overstating the denominator understates the toll on every price you set.
• Unpaid owner management. If your management time costs the books nothing, your overhead number is subsidized by your unpaid labor — and every price built on it is too low by that subsidy.
• One pool for very different lines. A business running a shop line and a field line may need overhead allocated per division, or the cheap-to-serve line subsidizes the expensive one invisibly.
• Set-and-forget. Overhead creeps — subscriptions, insurance renewals, the extra vehicle. Recompute annually and after any structural change; yesterday's 12% quietly becoming 18% means every bid formula in use is stale.