How to Calculate Overhead Rate in Construction?

Understanding and accurately calculating the overhead rate is critical for contractors. It is crucial to bid precisely, protect profit margins, and make informed financial decisions. The construction bookkeeping services are a competent solution to all construction financing matters.

What Is Construction Overhead?

Construction overhead refers to indirect costs supporting the operations, but it can’t be tied to a specific job. These overhead costs include:

• Office rent, utilities, and insurance

• Administrative salaries and benefits

• Equipment depreciation/maintenance, vehicle expenses

• Licensing, professional fees, and office supplies

Many of these are handled under construction bookkeeping services, ensuring your records stay organized and job costing remains accurate.

Why Calculating Overhead Rate Matters?

1. Precise Estimating & Bidding ensures the bids cover all true costs

2. Profitability Tracking helps see real margins by recovering indirect costs

3. Strategic Planning enables smarter resource allocation and pricing decisions

Examples of Direct vs. Indirect Costs

Direct: Labor, materials, subcontractors, equipment rentals

Indirect: Rent, admin expenses, insurance, office utilities

Overhead Rate Calculation Methods

Method A: Percentage of Direct Costs

Formula: Overhead Rate (%) = (Total Overhead ÷ Total Direct Costs) × 100

Example: $40,000 overhead ÷ $160,000 direct = 25%

Method B: Labor Burden Rate

Formula: Burden Rate = Total Overhead ÷ Total Labor Cost

Method C: Per-Hour or Unit Allocation

Formula: Overhead per hour = Total Overhead ÷ Total Billable Hours

Step-by-Step: Calculate Overhead Rate

1. List your indirect costs – Include everything from rent to office supplies.

2. Total indirect costs over a consistent period (monthly/annually).

3. Total direct costs for that same timeframe.

4. Calculate the overhead rate using one of the methods above.

5. Apply to job estimates – Add overhead to direct costs when budgeting.

Example: $50,000 indirect ÷ $200,000 direct = 25%. For a $100,000 job, allocate $25,000 overhead.

Allocate Overhead by Project

1. Flat Percentage Method: Apply your rate (e.g., 25%) uniformly.

2. Hourly/Unit Cost: Adjust based on labor hours.

3. Project Type Variance: Customize based on job complexity (e.g., residential vs. commercial).

Reliable construction bookkeeping services can help you allocate overhead by project with greater precision.

Improve & Lower Your Overhead

• Review regularly — at least quarterly

• Audit recurring costs — reassess utilities, insurance, and rent

• Automate processes — use accounting/job management software

• Optimize inventory — reduce storage and waste

Frequently Asked Questions

• Overhead vs. Markup: Overhead recovers business costs; markup sets profit target

• Tracking in QuickBooks: Use expense categories and job costing

• Need help? Get expert construction bookkeeping services when overhead tracking becomes complex or time-consuming

Final Thoughts

Consistent tracking and accurate overhead calculation empower you to bid smarter, improve efficiency, and grow profits. Whether you’re doing it in-house or with expert help, staying on top of your overhead is non-negotiable for long-term success.

Contractors Team helps construction businesses streamline their financial operations with reliable construction bookkeeping services and smart project insights.