How to budget overhead in a contracting business
Budget overhead by listing every cost that does not belong to a specific job, projecting each one for next year by month, separating fixed from variable costs, and comparing actual spending with the budget every month so markup and pricing stay grounded.
To budget overhead in a contracting business, start from last year's general ledger and pull out every expense that was not charged to a job: office salaries, rent, insurance not billed to jobs, vehicles used for management, software, accounting, marketing, and the owner's pay. Project each line for next year, adding planned hires, price increases, and anything new. Split the list into fixed costs that stay the same regardless of volume and variable costs that rise with it. Spread the total across 12 months, and every month compare actual overhead with the budget. That number then sets the markup you need on every job.
Overhead is the cost of being in business. Unlike job costs, it does not shrink when the work slows down, which is why a contractor with too much overhead for its volume can lose money on a year full of profitable jobs.
What counts as overhead and what does not
The line is simple in theory: if a cost exists because of a specific job, it is a job cost. If it exists to run the company, it is overhead. In practice, a few items cause arguments.
| Cost | Usually job cost | Usually overhead |
|---|---|---|
| Superintendent on one job | Yes, as general conditions | |
| Operations manager across all jobs | Yes | |
| Project managers | Often charged to jobs on larger work | Often overhead on smaller work |
| Estimators and bid costs | Yes | |
| Field trucks | Yes, at an internal rate | Unrecovered balance |
| Owner salary | Yes, at a market rate | |
| Workers' comp on field labor | Yes, in labor burden | |
| General liability insurance | Sometimes, if billed per job | Otherwise |
| Office rent, utilities, software | Yes | |
| Small tools and consumables | If tracked by job | Otherwise |
Whatever you decide, decide it once and write it down. The same cost cannot sit in the estimate as general conditions and in overhead too, or you will price it twice and lose bids. And it cannot sit in neither, or nobody pays for it.
How to build the overhead budget, step by step
- Pull last year's actuals. Run a profit and loss report with job costs separated from operating expenses. Use 12 months of history, not a single month annualized.
- Clean up the categories. Move misclassified job costs out and stray overhead in. Consolidate to 15 to 30 overhead lines you can manage.
- Pay the owner on paper. Include a market salary for the owner's role even if the owner takes draws instead. Otherwise the budget understates what the business really costs to run.
- Project each line forward. Apply known changes: lease escalations, insurance renewals, raises, new software, a planned office manager or estimator hire.
- Split fixed and variable. Rent and salaries are fixed. Bid costs, some insurance, bank fees, and commissions often move with volume.
- Spread it by month. Insurance renewals, annual software, bonuses, and tax prep do not land evenly. Monthly timing matters for the cash forecast.
- Set the overhead rate. Divide total overhead by forecast direct job costs (or by labor hours, if that suits your work) to get the recovery rate your pricing must cover.
- Review monthly. Compare actual with budget, line by line, and investigate anything off by a meaningful amount.
Worked example: a $5 million general contractor
Say a commercial GC expects $4,100,000 of direct job costs next year. Here is its overhead budget. All figures are illustrative.
| Category | Annual budget | Fixed or variable |
|---|---|---|
| Owner salary (market rate) | $150,000 | Fixed |
| Office manager and bookkeeper | $115,000 | Fixed |
| Estimator | $95,000 | Fixed |
| Payroll taxes and benefits on office staff | $72,000 | Fixed |
| Office rent and utilities | $48,000 | Fixed |
| Insurance not charged to jobs | $36,000 | Mostly fixed |
| Software and IT | $18,000 | Fixed |
| Accounting, legal, and bonding fees | $24,000 | Mostly fixed |
| Management vehicles | $22,000 | Fixed |
| Marketing and bid costs | $20,000 | Variable |
| Bank fees and interest | $10,000 | Variable |
| Office supplies and miscellaneous | $10,000 | Variable |
| Total overhead | $620,000 |
Overhead of $620,000 against $4,100,000 of direct costs is a recovery rate of about 15.1 percent. Before any profit, every job needs to carry at least that much on top of its direct cost. If the owner wants $250,000 of net profit, required gross profit is $870,000, a markup of about 21.2 percent on cost. The full markup method is in how to set construction markup and profit margin.
Now the test. If volume drops to $3,300,000 of direct cost, fixed overhead of about $580,000 stays put. At the same 21.2 percent markup, gross profit is roughly $700,000, and net profit falls by more than half. The budget shows the owner exactly which lines would need to change if the pipeline thins: perhaps the estimator hire waits, or the office lease is renegotiated.
Tracking overhead during the year
A budget nobody looks at is a guess. Each month, compare actual overhead with budget, and compare overhead as a percentage of revenue with plan. Watch for creep: a new software subscription here, a second office vehicle there. Small additions compound. Also watch the other side. If revenue is running ahead of plan and overhead is flat, the effective overhead rate is falling, and you may have room to sharpen bids.
Keep a simple monthly report with three columns per overhead line: budget, actual, and year-to-date variance. Ten minutes with the bookkeeper each month is enough. When a variance shows up, decide whether it is timing (the insurance payment came early) or a real change (a new hire). Real changes go into a revised forecast, and if the change is permanent, the overhead rate and markup on new bids should change with it.
Mistakes to avoid
- Leaving the owner's salary out, so overhead looks lower and markups end up too thin.
- Counting the same cost in general conditions and in overhead.
- Budgeting from one month's spending times twelve.
- Forgetting annual and irregular costs: insurance audits, bonuses, tax preparation, licensing renewals.
- Setting overhead as a percentage of revenue without checking that the revenue is realistic.
- Never revisiting the budget after a big change, like a new hire or a lost key customer.
Templates, terms, and tools
Use the construction budget template for the overhead budget and the construction cash flow template to place it month by month. Related guides: how to calculate construction overhead rate, how to build a construction company budget for the year, and how to calculate break even for a contracting business. Related terms: indirect costs and direct costs.
Smart Business Automator keeps job costs cleanly separated from company overhead and shows margin by job, so you can see whether jobs are covering the overhead you budgeted. See job costing and WIP automation.
Frequently asked questions
What is a normal overhead percentage for a contractor?
It varies widely by trade, company size, and how costs are classified, so comparisons between companies are often misleading. Calculate your own rate from your own budget and forecast volume, and track it year over year.
Should project managers be overhead or job cost?
Either can work. Many larger contractors charge PM time to jobs; many smaller ones carry PMs in overhead. Pick one, make your estimates match, and apply it consistently.
How often should I update the overhead budget?
Build it once a year and review actual against budget monthly. Revise it mid-year after a major change such as a new hire, a move, or a sharp change in volume.
Is overhead the same as general conditions?
No. General conditions are job-specific costs like the superintendent, trailer, and temporary utilities for one project. Overhead is the cost of running the company across all projects.
