Understanding Overhead Rates in the Trades: A Simple Framework

Every trades business has overhead. Rent, insurance, vehicles, admin staff, software, licenses. These are costs that exist whether the crew is on a job or not. These costs need to be paid. The only way they get paid is through the revenue your field team generates.

The overhead rate is the tool that makes this happen automatically, in every estimate, on every job. And most trades contractors either don't have one or have one that's wrong.

What Overhead Includes (And What It Doesn't)

Overhead includes every cost that isn't directly tied to a specific job:

• ✓Rent or mortgage on office, shop, or storage space
• ✓All insurance (general liability, workers' comp, commercial auto, umbrella)
• ✓Vehicle costs not tied to specific jobs (fleet maintenance, registration, depreciation)
• ✓Administrative and office staff salaries
• ✓Owner's salary when taken as a business expense
• ✓Software, phones, accounting fees
• ✓Marketing and advertising
• ✓Tools and equipment not allocated to specific jobs

Overhead does NOT include: materials, direct job labor, or subcontractor costs tied to specific jobs. Those are job costs (COGS), not overhead.

The Formula

Overhead Rate = Total Monthly Overhead ÷ Total Monthly Billable Hours

Billable hours = the actual hours your field employees work on revenue-generating jobs. Not total paid hours. Field employees aren't billable 100% of the time. Drive time, shop time, callbacks, and non-billable administrative time all reduce effective billable hours.

Example

A plumbing company has $32,000/month in overhead. They have 4 field technicians averaging 120 billable hours each per month. Total billable hours: 480.

Overhead rate = $32,000 ÷ 480 = $66.67 per billable hour

Every job estimate needs to include $66.67 per hour of expected job duration or the job is contributing nothing to overhead. And jobs that contribute nothing to overhead are jobs that cost the business money.

Why Most Rates Are Wrong

Using total hours instead of billable hours

If a technician works 160 hours/month but only 110 are billable, using 160 understates the overhead rate by 45%. The business recovers less per hour than it needs.

Using last year's overhead without updating

Overhead grows. You hire admin staff, add insurance, get a new vehicle. If your rate is based on last year's numbers, it's too low.

Ignoring owner's salary

If the owner works in the business but doesn't take a salary or takes a distribution instead, that labor cost isn't captured anywhere. The overhead rate (and pricing) should reflect the true cost of the owner's time.

How to Apply Your Overhead Rate

Add the overhead rate to your labor cost in every estimate:

Total job cost = (Direct labor cost per hour + Overhead rate per hour) × Estimated hours + Materials + Subcontractors

Then price to a target margin above that total cost. The overhead rate ensures every job is contributing proportionally to keeping the business running, not just covering its own direct costs.

Review Your Rate Quarterly

Overhead changes. New hires, new insurance premiums, added vehicles, dropped software. Any of these shift your overhead rate. Review it quarterly and adjust your pricing accordingly.

How CentsOf.AI Helps You Track Overhead

CentsOf.AI pulls your actual overhead costs from QuickBooks in real time. Ask:

• ✓"What are my total overhead costs this month?"
• ✓"How has my overhead grown over the last 12 months?"
• ✓"Which overhead categories are growing fastest?"

Your overhead rate is the foundation of accurate pricing. Get it right, apply it consistently, and update it regularly and every estimate becomes a step toward profitability instead of a guess.

CentsOf.AI

An AI-powered financial intelligence platform built for small businesses. Connect your QuickBooks account and get real-time answers about your financials in plain English, backed by every transaction.

Every Cent. Total Sense.