Construction overhead accounts for all the behind-the-scenes payments to keep your business running. It affects everyone in the construction industry, including self-employed tradespeople and big contractors working on multi-million dollar projects.
There are two types of overhead in construction: indirect (such as office rent and insurance) and direct (such as jobsite toilets or permits). To determine your overhead rate, you need to add up all your overhead costs, then divide the figure by your total job revenue for the same period.
Fortunately, you can trim overhead costs by doing things like improving your estimates or outsourcing admin work. However, a lot of construction business owners don’t track overhead the right way. They either mix it in with job costs or forget to include it in their pricing, which means they end up losing money without even realizing it.
In this article, we’ll break down the different types of construction overhead, show you how to calculate your overhead rate, share tips to keep costs down, and point out common mistakes to avoid along the way.
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What Is Construction Overhead?
Construction overhead refers to all the costs that keep your business running but are not tied to a specific project.
Here are some examples of overhead in construction:
Office expenses: Rent, utilities, office supplies, and equipment.
Insurance: General liability, workers' comp, and vehicle insurance.
Administrative salaries: Staff salaries, such as office managers.
Equipment depreciation: The loss in value of your tools and machinery over time.
Marketing costs: Advertising, website maintenance, and promotional materials.
Software & subscriptions: Estimating tools, project management software, accounting platforms like QuickBooks, or business software like ServiceTitan.
Vehicle expenses: Fuel, maintenance, insurance, and lease payments for company trucks or vans.
Phone & internet: Mobile plans for the team, jobsite Wi-Fi, office internet—basically anything keeping communication flowing.
Professional services: Accountant and legal fees, consultants, or safety auditors.
Licensing & permits: Business licenses, trade certifications, continuing education.
Employee benefits: Health insurance, retirement plans, training programs, safety gear.
Banking & financial costs: Loan interest, credit card fees, bank charges.
Storage costs: Renting warehouse or storage space for tools, materials, or equipment.
Overhead can eat into your profits if you don’t keep it in check. If you don’t account for overhead costs when bidding on jobs, you might end up paying for them out of your own pocket.
In fact, contractor overhead costs often make up a large proportion of total construction project expenses, so knowing your numbers and adjusting your bids accordingly is essential to maintaining financial health.
What Are the Different Types of Overhead Costs in Construction?
Improving accuracy in estimating and measuring construction overhead costs can improve cost performance by more than 9%, according to a recent study.
But first, you need to understand the different types of overhead costs. In construction, we typically categorize them into two main types: direct (job-specific) and indirect (general business) overhead.
1. Indirect overhead costs
Indirect overhead includes costs that support the business as a whole. Let’s take a look at some examples:
Office rent: The cost of leasing or owning your office space, which is the base that keeps your business running.
Admin salaries: Pays for your office staff, such as bookkeepers, CSRs, or operations managers. These are the people who keep everything organized behind the scenes.
General utilities: Things like electricity, water, and internet at your main office. These bills aren’t tied to one job, but you need them to keep the lights on—literally!
Insurance premiums: Includes general liability, workers’ compensation, and property insurance. You pay these to keep your company and employees protected.
Software subscriptions: Monthly or annual fees for accounting tools, estimating software, or project management systems. They help you run your operations more efficiently, but aren’t tied to any single construction project.
2. Direct overhead costs
Direct overhead costs are expenses tied to a specific project but aren't part of direct labor or materials.
Here are some examples of common direct expenses:
Equipment rentals: If you rent machinery like an excavator or skid steer just for one job.
Temporary site facilities: Setting up jobsite trailers, portable toilets, or on-site storage units for the duration of a project.
Project-specific insurance: Sometimes you need extra coverage, such as builder’s risk or higher liability limits, for a certain job.
Site cleanup: Final cleanup at the end of a job, including hauling debris or paying a crew to tidy up.
Testing and inspections: If a project requires special soil testing, concrete testing, or structural inspections, those costs are job-specific and count as direct overhead allocations.
How to Calculate Construction Overhead?
Calculating construction overhead isn’t too difficult once you know how. All you need to do is take the following steps.
Step 1: Identify all overhead costs
Start by listing all your business expenses that aren't directly tied to specific projects. The following categories will help you identify them.
Fixed overhead costs: Expenses that remain constant regardless of the number of projects, such as office rent, insurance premiums, and administrative salaries.
Variable overhead costs: Expenses that fluctuate with the level of business activity, like utilities, office supplies, and vehicle expenses.
Semi-variable overhead costs: These have both fixed and flexible parts. For example, work trucks have set costs like the lease and insurance, as well as variable costs such as gas and maintenance, depending on how much you’re using them and current prices.
Step 2: Total your overhead expenses
Once you've identified all overhead costs, sum them up to get the total overhead expenses for a specific period, such as a month or a year.
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Step 3: Determine your total direct costs
Calculate the total direct costs incurred during the same period. Direct costs are traceable directly to specific projects, including labor hours, materials, and equipment expenses.
Step 4: Calculate the overhead rate
Divide the total overhead expenses by the total direct costs to determine your overhead rate. This rate represents the proportion of overhead costs relative to direct costs. Below, you can find it expressed as a formula:
Step 5: Apply the overhead rate to projects
To estimate the overhead costs for a specific project, multiply the overhead rate by the project's direct costs.
Here is an example of the entire process:
Total Overhead Expenses: $50,000 per year
Total Direct Costs: $200,000 per year
Overhead Rate: $50,000 ÷ $200,000 = 0.25 (or 25%)
Project's Direct Costs: $20,000
Estimated Overhead for Project: $20,000 × 0.25 = $5,000
How Can You Manage Construction Overhead Costs?
If you don’t keep a lid on overhead costs, it can impact your profitability. Below, you’ll find five ways to manage and reduce construction overhead costs with detailed descriptions.
1. Create project estimates
Making your project cost estimates as accurate as possible helps keep costs down, as inaccurate estimates lead to cost overruns and delays. It’s a good idea to track project budgets versus actual costs to identify areas of overspending and adjust accordingly.
ServiceTitan’s Contractor Project Tracking Software gives you a detailed comparison of budgeted costs to actual expenses in real-time. You get a high-level financial view of all active projects, including costs and construction overhead throughout all the project phases.
2. Align workforce with project demand
If you hire too many workers, you'll burn through your budget too quickly; too few, and projects get delayed, so it’s important to balance your workforce.
ServiceTitan's Construction Software is ideal.
It helps optimize labor forecasting, allocation, and scheduling, and is a handy tool for matching workforce capabilities with project demands.
3. Outsource specific tasks
One way to improve efficiency, cash flow, and control overhead costs is to outsource certain operational tasks, rather than expanding your team with full-time staff.
Many small businesses outsource financial tasks like accounting and bookkeeping. You can also outsource project management to experienced people when things get busy.
Outsourcing means you give up some control, but through prequalification and regular audits, you can mitigate many of those risks. When you find reliable partners who communicate well, you can establish a working relationship that helps you save money or balance costs over the long term.
4. Track and manage inventory usage
Balancing inventory is a common challenge in construction and can ramp up overhead costs. It’s best to centralize your inventory management to control it better.
ServiceTitan’s Contractor Inventory Management is the ideal tool as it pulls all your inventory data together in one place, letting you easily track purchases, vendor returns, transfers, and adjustments. You’ll always know what’s in stock across multiple locations to prevent overstocking or running out of materials.
5. Minimize rework
Rework is a headache for construction companies as it slows down the project and increases costs. The best way to avoid rework is to get things right the first time by staying organized and proactive.
ServiceTitan's Construction Management Software offers a wide range of project tracking features. It lets you monitor every aspect of a project in real time, so you can catch any deviations from the plan early enough and stop them from turning into bigger problems.
Rework often stems from miscommunication, poor planning, or a lack of coordination. ServiceTitan helps by storing and sharing all project info and data in one place. Everyone from office staff to field workers can access the info on their devices.
The software also has automated scheduling and dispatching, which ensures that the right personnel with the appropriate skills are assigned to tasks.
What Is a Good Construction Overhead Percentage?
A good construction overhead percentage is around 10%. That means for every dollar your business brings in, about 10 cents go toward overhead costs, such as rent, insurance, admin wages, tools, and trucks.
Some companies run closer to 20% depending on how they operate, the size of their projects, and what kind of costs they carry, especially if they’re doing large-scale jobs with more complexity and support needs.
Your overhead percentage is a snapshot of how efficient your business is. If it’s too low, you might not be investing enough in your operations (or worse, forgetting to track some costs). If it’s too high, you’re probably bleeding money somewhere—maybe you’ve overhired or your equipment costs are too steep.
To calculate your overhead percentage, use the formula below.
For example, if your business has $25,000 in monthly overhead and brings in $250,000 in revenue, your overhead rate is 10%.
Most construction businesses aim for an overhead percentage of 10% and a markup or profit margin of at least 10%.
What Are Some Mistakes Construction Contractors Should Avoid in Overhead?
It’s pretty common for general contractors or subcontractors to make mistakes related to overhead cost management, especially in the early days of running their business.
Here are some of the most common mistakes and how to avoid them.
1. Underestimating overheads
Background costs like insurance, office rent, and software subscription can add up faster than you think. It can lead to underbidding on jobs and hitting your bottom line. Use real-time data to get a more accurate picture of your spending and how it compares to your budget.
2. Ignoring how overhead reacts to project volume
As your business grows or slows, overhead costs might not change at the same rate. It’s important to look out for your break-even point on different projects, cut back on overheads when things slow down, and pick up when you have more jobs. Failing to do this means you could end up in the red.
3. Bad allocation
A $300K kitchen renovation shouldn’t carry the same overhead share as a $30K bathroom remodel. Don’t be tempted to just spread overhead evenly across projects, as this will skew your numbers. Either use hours worked, materials used, or direct costs to spread overhead where it actually belongs.
4. Not doing regular reviews
If you’re not checking your overhead numbers at least once a month, costs can creep up on you. It’s always a good idea to keep your spending in check and to cut back where possible.
5. Not updating your budget as business grows
More jobs equals more administrative expenses, more software, more everything. What worked for three guys and a truck doesn’t cut it when you’ve got 20 people and five projects running. Make sure you update your budget more frequently during growth phases.
Otherwise, you’re setting yourself up for resource gaps and the potential for shrinking profits.
What Is Overhead Recovery in Construction?
Overhead recovery in construction is a method to ensure your indirect costs, such as rent, admin salaries, insurance, and office expenses, are fairly spread out across all your jobs.
It prevents you from allocating all the weight of your indirect expenses on one or two big jobs. You break it down so every project covers a fair share of the overhead.
For example, let’s say your company has $200,000 in overhead costs (office, admin, insurance, etc.) and $1,000,000 in direct costs (labor, materials, equipment tied to specific jobs).
Overhead Recovery Rate = ($200,000 ÷ $1,000,000) × 100 = 20%
That means for every $1 you spend on direct costs, you should add 20 cents to cover overhead. If you don’t build that extra overhead recovery rate into your job pricing, you’ll lose money before you even do any work.
Efficiently Manage Your Projects with ServiceTitan
Managing overhead in construction gets much easier when you’ve got the right tools on hand. ServiceTitan is ideal as it ties all your project info and data together in one platform, including costs and estimates. It even integrates directly with common accounting software (such as QuickBooks) with data flowing between them to make your life even easier.
ServiceTitan offers powerful project tracking tools and integrations to show what was budgeted against what you’ve actually spent. You can use the labor management tools to keep labor costs under control. The inventory management tools help you monitor supplies and plan material costs more accurately. Try ServiceTitan today.
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