RHACOVA

Labor and overhead

How to Calculate Construction Overhead

Rent, insurance, the truck payment and the phone get paid whether you sold a job this week or not. Overhead recovery decides how those costs reach your prices.

The short answer

Total every cost that exists whether or not you sell a job — that is your overhead. Then choose a recovery basis: the hours you can bill in a year, or the direct cost you expect to run through the business. Dividing annual overhead by that basis gives either a dollar amount per productive hour or a percentage to add to direct cost. Both are legitimate; the right one depends on how your work varies.

Definitions

Overhead
Costs of being in business rather than of doing one job: rent, insurance, office and admin wages, software, vehicles not charged to jobs, accounting, marketing, licences, phones.
Direct cost
Cost caused by a specific job. If the job disappears, the cost disappears with it.
Recovery basis
The denominator you spread overhead across — billable hours, or expected annual direct cost. It must reflect how your jobs actually consume the business.
Overhead recovery
Getting overhead back through the prices you charge. Recovery brings you to break-even; it is not profit.

The two recovery formulas

Overhead per productive hour = annual overhead ÷ annual productive hours

Overhead rate on cost = annual overhead ÷ annual direct cost (expressed as a percentage)

The first suits labor-driven work, where a job consumes the company in proportion to the hours it takes. The second suits material- or subcontractor-heavy work, where a large job passes more cost through the business regardless of crew time. Using the wrong one systematically overcharges some jobs and undercharges others.

Worked example: the same overhead, two methods

$6500 of overhead per month, 3400 productive hours a year and $420000 of annual direct cost:

  • Annual overhead: $78,000.00
  • Recovered per productive hour: $22.94
  • Recovered as a percentage of direct cost: 18.57%

Same overhead, two different shapes of answer. A job with heavy crew hours and little material recovers more under the hourly method; a material-heavy job recovers more under the percentage method. Neither result is more correct in the abstract — the question is which one matches how your jobs consume the business.

The denominator is where this goes wrong

Overhead recovery fails far more often through an optimistic denominator than through a missed cost. Assuming 2,000 billable hours a year from a crew that actually bills 1,500 understates the required recovery by a quarter. Use the hours you genuinely billed last year, not the hours you would like to bill.

The same discipline applies to the productive-hour figure itself, which comes out of the labor burden calculation — paid hours are not billable hours.

Common mistakes

  • Treating overhead recovery as profit. Recovery returns you to zero; profit is added after.
  • Charging overhead through a "10% O&P" line without ever checking it against the actual overhead total.
  • Leaving the owner's salary out. If you work in the business, your pay is a real cost, whether or not you take it this month.
  • Double-counting a cost that is already in a job's direct cost, such as a truck charged to jobs and also carried in overhead.
  • Recalculating overhead once and never revisiting it after the business grows.

Quick answers

What counts as overhead versus a job cost?
If the cost exists because a specific job exists, it is a job cost. If it continues whether or not that job is sold, it is overhead.
Is there one correct way to recover overhead?
No. Recovering per productive hour suits labor-driven work; recovering as a percentage of direct cost suits material-heavy work. The method has to match how your work varies.
Is overhead recovery the same as profit?
No. Recovering overhead only gets you back to zero. Profit is what you add after both direct cost and overhead are covered.

Run the numbers

Total annual overhead, the recovery basis you chose, overhead per productive hour and overhead as a percentage of direct cost.

Open the Overhead Recovery Calculator

Free, no account, and the answer stays on the page.

Store your overhead recovery figure

Your Numbers keeps your overhead assumption in one place with its provenance, so estimates stop carrying a number nobody can explain.

Open Your Numbers

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

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