How to calculate overhead costs

What counts as overhead

Some costs can sit in either group depending on how you track them. A truck used by one crew on one long job might be a direct cost; a truck shared across many small jobs is overhead. Be consistent. Owner salary is often treated as overhead if the owner mainly manages, or split if they also do billable work.

To record clock-ins, breaks and overtime automatically, see EZTime time and attendance software.

Fixed, variable and semi-variable overhead

• Fixed: stays roughly the same each month, such as rent, insurance and software subscriptions.
• Variable: rises and falls with activity, such as fuel for service vehicles, card processing fees or shop supplies.
• Semi-variable: a fixed base plus a variable part, such as utilities or phone plans.

Knowing the mix helps with planning: fixed overhead has to be covered even in a slow month.

Step 1: total your overhead

Pull a year of expenses from your accounting records, or budget the year ahead, and list every overhead item. Annual totals smooth out seasonal swings and one-off payments such as insurance premiums.

Step 2: choose a base and calculate the rate

Use the method that matches how costs actually behave. If overhead mostly supports crews’ time in the field, a per-labor-hour rate is usually the most useful for pricing. Our overhead rate calculator does the math.

Step 3: use the rate in pricing

Once you know the overhead rate, add it to direct costs on every quote. For a job estimated at 12 direct labor hours, with direct labor cost of $40.00 an hour and materials of $300:

See our guides on pricing a trade job and pricing cleaning services, and our profit margin calculator.

Getting direct labor hours right

A per-labor-hour rate is only as accurate as the hours behind it. Use billable or direct hours, not total paid hours: travel between jobs, training, shop time and admin are usually not direct hours unless you track and charge them as such. If you divide overhead by total paid hours, your rate will be too low and every price will undercharge. Time tracked by job gives you the real figure. See job costing with time tracking and our labor burden calculator.

Overhead for multi-location or multi-service businesses

If you run several locations or service lines, decide whether to use one company-wide rate or separate rates. A company-wide rate is simpler; separate rates are more accurate when overhead differs a lot, for example a location with expensive rent or a service line that needs heavy equipment. A common approach is to assign costs that clearly belong to one location or line directly, then spread shared costs such as head office using a single base.

Reducing overhead

• Review subscriptions and software every year; cancel what is not used.
• Shop insurance at renewal and review coverage with your broker.
• Cut admin time with simpler processes, such as digital timekeeping instead of paper. See workflow automation.
• Share or sublet space you do not fully use.
• Track vehicle use and fuel; idle vehicles are expensive overhead.
• Grow billable hours: the same overhead spread over more hours lowers the rate.

Review the rate regularly

Recalculate your overhead rate at least once a year, and whenever a big cost changes, such as a new lease, a new office hire or a large insurance increase. Compare actual overhead with the budget quarterly. If billable hours fall short of plan, the effective overhead rate rises, and prices set on the old rate stop covering costs.

Comparing the three methods on the same numbers

Using the fictional figures above, the same $150,000 of overhead gives $25.00 per direct labor hour, 62.5% of direct labor cost, or 25% of revenue. They are three views of the same cost, and on an average job they give similar answers. They diverge on unusual jobs. A job with highly paid specialists carries more overhead under the labor-cost method than under the hours method. A job with expensive materials and little labor carries more under the revenue method. Pick the base that best matches what actually drives your overhead. For most service and trade businesses, overhead grows with crew size and hours worked, which is why the per-hour method is the usual choice. Whichever method you choose, use it consistently so quotes, job costing and reviews all compare like with like.

Common mistakes

• Leaving out the owner’s management time or salary.
• Dividing by total paid hours instead of direct hours.
• Forgetting annual costs such as insurance premiums or license renewals.
• Using an old rate after costs have risen.
• Treating overhead as “already covered” and pricing only on labor and materials.

How EZTime helps

EZTime records employee hours from clock-ins and lets you assign time to jobs and clients with job and client tracking, so you can separate direct hours from travel, training and admin. Reports export by job and period, giving you the direct labor hours you need for an accurate overhead rate and job costing.

Overhead worksheet (fictional)

If crews work 1,700 direct labor hours a month, the overhead rate is $12,750 / 1,700 = $7.50 per labor hour. Use our overhead rate calculator.

Where overhead hides

• Unbilled travel and setup time.
• Owner time spent on admin.
• Rework and callbacks.
• Idle equipment.
• Small recurring subscriptions.

Some of these are not overhead by definition, but they act like it if you do not price them. See how to reduce business costs.

Your next 30 days

1. List every overhead cost from the last 12 months.
2. Choose the allocation base that fits your business.
3. Calculate the rate and compare it with your current prices.
4. Check whether direct labor hours are recorded accurately.
5. Schedule a quarterly review.

Overhead in a slow month

In a slow month, direct labor hours fall but most overhead stays the same, so the effective overhead per hour rises. Price from an average month, not your busiest one, and keep a cash cushion for slow periods. If slow months are predictable, plan maintenance, training and marketing for them, so the time is still productive.

Overhead accuracy check

Tick each statement that is true.

Frequently asked questions

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