You searched contractor overhead percentage because your bids look profitable on paper and the bank account says otherwise. I see this constantly. A contractor prices a job at a 25% gross margin, yet at year-end there is nothing left. The culprit is almost always overhead that was never loaded into the bid or was underestimated by half.

What Counts as Overhead vs. a Direct Job Cost?

Direct costs disappear when you have no work. Overhead sticks around. That is the simplest way to separate them. Direct costs are materials, subcontractor invoices, and wages for crew assigned to a specific job. Overhead is everything else — the cost of keeping the doors open whether you are on a job site or not.

If you are unsure whether an expense is direct or indirect, ask whether you would still pay it if every current job disappeared tomorrow. If the answer is yes, it is overhead. For a deeper breakdown, see our job costing hub or our guide on job costing for contractors.

What Is a Healthy Contractor Overhead Percentage?

There is no single magic number, but the range matters. In my experience, a solo trade contractor working from home often runs 8% to 12% of revenue in overhead. A small residential general contractor with a yard and an office manager usually lands between 15% and 20%. Large commercial firms can push below 10% because the revenue base spreads the same fixed costs much thinner.

If you are a small contractor and your overhead is consistently above 20% of revenue, your pricing model or your cost structure is broken, not your trade. The fix is rarely just cutting costs. It is usually repricing to reflect reality. We cover how gross profit targets shift with job size in our post on gross profit targets by job size.

How Do I Calculate My Overhead Percentage?

Pick a period. A full year is best, but a rolling twelve-month window works if you are seasonal. Add every expense that is not a direct job cost. That total is your indirect cost. Divide it by your total revenue for the same period. Multiply by 100.

Say you did $800,000 in revenue last year. Your indirect costs came to $120,000 once you added everything that was not a direct job cost. That total includes shop rent, general liability and workers' compensation insurance, bookkeeping, your own non-billable wages, truck payments, phone, and marketing. Now divide the indirect cost total by the revenue. The result is 0.15. Multiply by 100 and you get 15%. That is your overhead percentage. Every bid you write needs to carry that 15% load, or you are working for your overhead instead of keeping it.

Why Does My Overhead Percentage Change With Job Size?

Overhead is mostly fixed. Rent does not double when you land a second job. Because of that, small jobs get hammered by overhead. A $5,000 repair job carries overhead. If the allocation is $500, the job has already lost 10% of its value before anyone picks up a hammer. A $500,000 custom home carries the same overhead allocation. That allocation is $500. Its loss is only 0.1%.

This is why many contractors lose money on small jobs without realizing it. They price the labor and materials correctly, but they do not load enough overhead to cover the administrative cost of starting, managing, and closing a small project. If you want to see how job size should shape your pricing, read our piece on big jobs versus small jobs.

Should I Add Overhead to My Bids as a Markup or a Margin?

This is where contractors quietly give away their profit. Markup and margin are not the same thing. If your overhead is 15%, you need to know what markup actually delivers your intended profit. Say you want a 10% net profit. Adding 25% markup to your direct costs will not get you there. That markup only produces a 20% total margin. Your actual net profit ends up closer to 5%. To protect a true 10% net profit, you need a higher markup. That figure is roughly 29%. The math is unforgiving. I explain the exact mechanics in our guide to markup versus margin for contractors.

How Does Overhead Affect My Tax Bill?

Overhead is an ordinary and necessary business expense under IRC §162, so it comes off before tax. That helps, but it does not make the spending free. You are still out of pocket for the full cost minus whatever tax savings the deduction produces. I see contractors rationalize a new truck or a bigger shop by calling it a write-off. A write-off only refunds a fraction of the cost. You still eat the rest.

Your net profit after overhead is what drives self-employment tax, federal income tax, and state tax. If you are operating as a sole proprietor or single-member LLC, that net profit is reported on Schedule C and is subject to self-employment tax before you even get to income tax. If you have elected S-Corp status, your owner salary is part of overhead, and the remaining profit passes through on Schedule K-1 from Form 1120-S. The structure changes where the tax lands, but it never makes overhead disappear. For a look at how entity choice changes the math, see our comparison of LLC versus S-Corp for contractors.

What Can I Do if My Overhead Percentage Is Too High?

First, know your real number. Most contractors who think their overhead is 10% are actually at 18% because they forgot the owner draw, the storage yard, or the tool payments. Once you have the real figure, you have three levers.

• Cut fixed costs. Renegotiate insurance, sublease unused shop space, or trim subscriptions.
• Increase prices or volume without adding overhead. The easiest way to lower your overhead percentage is to raise revenue while keeping the same shop and staff. A 10% price increase on re-bids, with no new costs, drops your overhead percentage immediately.
• Restructure how you operate. Drop the dedicated office and use a home office deduction, share yard space with another contractor, or sub out your back-office bookkeeping instead of hiring a part-time admin.

None of this requires a miracle. It requires knowing your number and protecting it in every bid.

Quick Questions on Contractor Overhead

Want a second set of eyes on your job-costing numbers before you price your next bid? We help contractors build bids that recover every indirect cost and still leave real profit on the table. Book a meeting with our team here.