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💰 Overhead & Markup

Many contractors don't understand their true costs. This leads to underpricing work and wondering where the profit went.

Key Principle

If you don't know your overhead rate, you're guessing at your prices. And probably guessing wrong.

Understanding Overhead​

What Is Overhead?​

Costs that aren't tied to a specific job but are necessary to run your business:

  • Office rent
  • Administrative salaries
  • Insurance (general)
  • Vehicles
  • Office supplies
  • Professional fees
  • Marketing
  • Software/technology

Calculating Your Overhead Rate​

Step 1: Total annual overhead costs

Step 2: Divide by direct costs (or revenue)

Example:

  • Annual overhead: $300,000
  • Annual direct job costs: $2,000,000
  • Overhead rate: 15% of direct costs

Or based on revenue:

  • Annual overhead: $300,000
  • Annual revenue: $2,500,000
  • Overhead rate: 12% of revenue

Markup vs. Margin​

They're Not the Same​

Markup: Added to cost to get price

  • Cost: $100 + 20% markup = $120 price

Margin: Profit as % of price

  • Price: $120, Cost: $100 = 16.7% margin

Conversion Table​

MarkupMargin
10%9.1%
15%13.0%
20%16.7%
25%20.0%
30%23.1%
35%25.9%
40%28.6%
50%33.3%

Pricing Your Work​

The Basic Formula​

Direct costs
+ Overhead (your rate × direct costs)
+ Profit (your target %)
= Selling price

Example​

Direct costs: $100,000 Overhead (15%): $15,000 Subtotal: $115,000 Profit (10%): $11,500 Selling price: $126,500

Combined markup: 26.5%

What's a Reasonable Profit?​

Typical ranges:

  • Residential: 10-20%
  • Commercial: 5-15%
  • Heavy/civil: 3-10%

Depends on:

  • Risk level
  • Competition
  • Your efficiency
  • Market conditions

Common Pricing Mistakes​

1. Not Including All Overhead​

Missing items:

  • Owner's salary
  • Vehicle costs
  • Insurance deductibles
  • Bad debt allowance
  • Technology costs

2. Pricing Based on Competition Only​

Problem: You might be copying their mistakes Solution: Know your costs, then decide if you can compete

3. Inconsistent Application​

Problem: Different markup on different jobs Solution: Systematic approach to all estimates

4. Forgetting Burden on Labor​

Labor burden includes:

  • Payroll taxes (7.65% FICA)
  • Workers' comp (varies by trade)
  • Health insurance
  • Retirement contributions
  • Paid time off

Burden typically adds 25-40% to base wages

Improving Your Margins​

Reduce Overhead​

  • Review all expenses annually
  • Negotiate better rates
  • Eliminate waste
  • Technology investments that save money

Increase Efficiency​

  • Better estimating
  • Tighter job management
  • Reduced rework
  • Improved productivity

Better Project Selection​

  • Avoid low-margin work
  • Focus on your strengths
  • Target clients who value quality