Overhead Rate: What Should Yours Be?

Most Contractors Don't Know Their Real Overhead Rate

I ask this question in almost every first meeting: "What's your overhead rate?"

The responses cluster into three categories. Some contractors quote a number that includes job costs they've misclassified as overhead (making overhead look inflated). Some quote a number that's missing entire categories like vehicle costs and unbilled labor (making overhead look deceptively lean). And a meaningful minority say they don't track it separately from their overall cost structure.

All three are flying blind on one of the most important numbers in their business.

Overhead rate determines your minimum markup. It sets the floor for profitability before you touch gross margin. And because overhead is almost entirely fixed in the short run, getting it wrong by 5 points in either direction cascades into a $150,000 pricing error on a $3M revenue base.

Before we get to benchmarks, we need a clear definition — because the definition is where most contractors go wrong.

What Overhead Actually Is

Overhead is every cost that doesn't get charged to a specific job. If you can't write "Job #1047" on the expense, it's overhead.

What goes into overhead:

Office rent and utilities
Admin and office salaries (office manager, bookkeeper, CSR when not job-coded)
Owner salary (the portion not attributable to field work)
General liability insurance (not the portion on a certificate for a specific job)
Vehicle costs for non-field-assigned vehicles (owner's truck, shop vehicles)
Marketing and advertising
Software subscriptions (QuickBooks, field service platform, CRM)
Accounting and legal fees
Phone and data for office staff
Shop/warehouse costs not attributable to specific jobs
Training time not billed to a job

What does NOT go into overhead (these are direct job costs):

Field labor wages for hours worked on jobs
Materials and equipment purchased for specific jobs
Subcontractors hired for specific jobs
Field vehicle costs when the truck is assigned to and billed on a job
Workers comp insurance when it's job-coded for certified payroll purposes
Permits pulled for specific jobs

The line between overhead and direct cost is blurry in practice, which is why contractors get confused — and why comparing your overhead rate to benchmarks only works if you're categorizing costs consistently.

The most common miscategorization: vehicle costs. If your trucks are running jobs all day, the depreciation, insurance, and fuel are a job cost (absorbed in your labor rate or billed directly). If you have an owner's truck that never goes to a job site, that's overhead. Most contractors are somewhere in between, and the allocation is imprecise — which is fine, as long as it's consistent.

Overhead Benchmarks by Company Size

From the CFMA Construction Financial Benchmarker (1,558 firms) and our own analysis of 2,200+ contractors across trades:

$1-3M Revenue: 25-35% Overhead

At this size, you're paying for infrastructure that doesn't scale yet. You probably have:

1-2 office staff
An owner who does some field work and some admin
One or two trucks that serve dual purposes
Fixed costs (office, insurance, software) that don't drop much even if revenue softens

The overhead rate at this size is naturally high because you're paying for the fixed cost foundation before you have the volume to leverage it. A $1M contractor with $300K in overhead (30%) can potentially grow to $2.5M with the same overhead structure — at which point their overhead rate drops to 12%. That's fixed cost leverage in action.

The danger at this size is overhead creep before revenue growth materializes. I've seen $2M contractors with 38% overhead because they built out their office team, upgraded their software stack, and expanded their facility — all before the revenue justified it. That's a pre-revenue bet that sometimes pays off, but it's a bet you need to understand consciously.

$3-10M Revenue: 20-28% Overhead

This is where most service contractors live, and the target range is narrower than most people expect. The ACCA Annual Financial Survey of 153 HVAC companies shows median overhead in this range running 22-25%.

At $5M revenue, 28% overhead = $1.4M in fixed costs annually. That sounds large until you break it down: $400K in admin salaries, $200K in facilities, $300K in vehicles and equipment overhead, $150K in insurance, $250K in all other categories (marketing, software, professional fees). It fills up fast.

The bottom of the range (20-22%) is achievable for lean operations with:

Heavy field-to-office ratio (8:1 or higher)
Minimal facility footprint (shop but no large warehouse)
Flat management structure (owner-operator + one admin)
Strong field service software reducing admin overhead

The top of the range (26-28%) is common for companies that have:

Grown rapidly and added admin staff ahead of revenue
Added service lines that require separate coordination
Taken on commercial work requiring certified payroll administration and additional back-office complexity

$10M+ Revenue: 15-22% Overhead

At scale, fixed costs spread across a larger revenue base. A $15M mechanical contractor that grew from $8M still has roughly the same office footprint — the overhead dollars may have grown by 20%, but the revenue grew by 90%. That's leverage.

FMI Capital Advisors' survey data shows that the best-in-class contractors at $15M+ run overhead at 14-16%. These are typically companies with:

Strong operational systems that reduce per-job admin burden
Centralized dispatch covering multiple crews without proportional admin growth
Owner fully removed from field work (overhead dollars but generating value through management leverage)

The floor matters: below 12%, you're probably not investing enough in the systems and people that create scalability. Many of the contractors I've seen at 10-12% overhead are running lean to a fault — the owner is doing accounting, the office manager is dispatching, and there's no bandwidth for anything that goes wrong.

Why Overhead Percentage Matters for Pricing

Here's why this number isn't just an accounting exercise.

Your overhead rate is the minimum premium you must charge above direct costs to break even. If your overhead is 28% of revenue, then for every dollar of direct job cost (labor + materials + subs), you need to recover 28 cents just to cover overhead — before profit.

Let's make it concrete. Say a service call has:

Labor cost: $80 (2 hours at $40/hr fully loaded)
Materials: $120
Direct job cost: $200

To cover 28% overhead on top of that job, your minimum revenue from that call is:

Revenue = Direct cost / (1 - overhead rate - target profit margin) Revenue = $200 / (1 - 0.28 - 0.10) = $200 / 0.62 = $322

So your minimum billable for that $200 job is $322 just to break even on overhead and hit 10% net. Price it at $240 because it "sounds right" and you're operating at a loss.

This is the math behind why contractors struggle with pricing. They quote based on what feels competitive, not on what their cost structure requires. The overhead rate is the bridge between cost and price — and if you don't know it, you're guessing.

The calculation also shows why overhead reduction is more powerful than most contractors realize. Drop overhead from 28% to 22% (achievable over 12-24 months for a $5M contractor), and your minimum price on that same $200 job drops from $322 to $299. Suddenly you're more competitive on pricing without cutting margin — or you're more profitable at the same price.

The Three Overhead Categories That Catch Contractors Off Guard

1. Vehicle Costs (Usually 2-3x What Contractors Think)

Most contractors mentally account for truck payments. Few account for the full picture:

Loan payment or depreciation
Commercial vehicle insurance
Fuel (often 2-3x higher than personal vehicle estimates)
Maintenance and repairs
Registration and licensing
GPS and fleet tracking software

When I run a full vehicle cost analysis for a contractor with eight trucks, I rarely get a number below $15,000 per truck per year. Often it's $18,000-22,000. For overhead-allocated vehicles (shop trucks, owner vehicles, training vehicles), that's $60,000-100,000 in overhead cost that frequently shows up as scattered line items — fuel here, insurance there, loan payment in another account — rather than consolidated.

The fix: create a single "fleet" overhead category and load it with everything related to non-job vehicles. Then you can actually see it.

2. Workers Compensation Insurance

Workers comp rates vary by classification code, experience modifier (EMR), and state — and they compound in ways that surprise contractors who haven't modeled them.

For HVAC, plumbing, and electrical trades, WC rates typically run 5-15% of payroll. A $500K payroll at a 10% rate is $50,000 in WC premium. If your EMR has climbed above 1.0 from prior claims, add a surcharge. If you've expanded into higher-risk work (commercial roofing, high-rise mechanical), add a classification upgrade.

The contractor who thinks they're running 22% overhead and excludes WC from the calculation because "it comes out of payroll" is actually running closer to 28-30%. Workers comp is overhead. It goes on the indirect cost stack.

The good news: EMR is manageable. Claims management, return-to-work programs, and safety protocols directly reduce your EMR over three years. A drop from 1.3 to 0.9 on a $500K payroll at 10% WC = $20,000/year in saved premium. That's real margin improvement that shows up in overhead reduction.

3. Unbilled Labor

This one is almost never discussed as overhead, but it should be.

Unbilled labor is time your techs spend on company activities that don't get billed to a job: shop meetings, training, vehicle maintenance, parts runs, administrative tasks. In many field service operations, this represents 5-15% of total payroll hours — and it sits in overhead rather than job cost.

A 10-tech crew at $50K average wages = $500K in payroll. If 10% of their time is unbilled (administrative, training, etc.), that's $50,000 in labor overhead that doesn't show up as a job cost anywhere. But it's not in most contractors' overhead calculations because it's mixed into their payroll line on the P&L.

The fix: use your field service software to categorize non-billable activities separately. Create codes for "Shop/Administrative," "Training," "Vehicle Maintenance," etc. That time gets allocated to overhead, giving you a more accurate picture of what you're actually spending.

The Contrarian Take: Low Overhead Isn't Always Good

There's a version of overhead optimization that actually hurts contractors. I've seen it at the companies running 12-14% overhead on $5-8M revenue — the numbers look great on paper until you examine what they're missing.

These companies often have:

No dedicated estimator (the owner does all bids, creating a growth ceiling)
No marketing function (growth is 100% referral, creating vulnerability)
Bookkeeping done by a family member at below-market cost (not showing in overhead)
The owner acting as dispatcher, HR, and purchasing agent (their time cost isn't captured)

When I add in the true cost of the owner's time at market rate, and the implicit cost of the missing functions, overhead often jumps to 18-20%. The "lean overhead" was partly an illusion built on invisible subsidies from the owner.

Overhead isn't something to minimize at all costs. It's something to optimize. The right overhead structure for your size and growth ambitions enables scale — the wrong structure either constrains growth (too lean) or bleeds profit (too heavy).

Connecting Overhead to the Full P&L

Overhead rate is one piece of a three-part profitability equation:

Gross margin - Overhead rate = Net margin

At the benchmark numbers for a $5M contractor:

Gross margin: 43%
Overhead: 28%
Net margin: 15%? No — because overhead as a % of revenue is calculated differently than overhead as a % of gross.

Here's the correct way to think about it:

If revenue is $5M and overhead is $1.4M (28%), and gross margin is 43% ($2.15M gross profit), then:

Net profit = Gross profit - Overhead = $2.15M - $1.4M = $750K = 15% net

The benchmark net for a well-run $5M contractor is 10-12%, so 15% is excellent. This shows that the relationship between gross margin and overhead determines net — and small improvements in either one have outsized impact on profitability.

For more on how to read these numbers in your actual P&L, see how to read a contractor P&L. For job-level cost tracking that feeds your gross margin calculation accurately, see QuickBooks job costing for contractors.

What "Normal" Looks Like: A Quick Self-Check

Run this right now. Pull your last full-year P&L:

Total revenue: ______
Total direct costs (labor, materials, subs on jobs): ______
Gross profit = (1) - (2): ______
Total overhead (everything that can't be charged to a specific job): ______
Overhead rate = (4) / (1): _____%

Compare your number to the benchmarks:

$1-3M revenue: 25-35% overhead — if you're above 35%, something has crept in
$3-10M revenue: 20-28% overhead — if you're above 30%, there's a specific culprit worth finding
$10M+ revenue: 15-22% overhead — if you're above 25%, you're not capturing the scale leverage you've earned

If your overhead rate is outside the benchmark for your size, the next step is to break it into categories and find the outliers. Vehicle costs are the most common surprise. Unbilled admin labor is the most commonly overlooked. Owner compensation structure is the most complicated (equity vs. salary vs. distributions all get treated differently).

Q: Should owner salary go into overhead? A: Yes — the portion that represents management and administrative work. If you're also doing field work, the hours you spend in the field can be allocated to job cost (your own billable time). The hours you spend on management, bidding, and administration go to overhead. The tricky part is that many contractor-owners pay themselves below market rate and then wonder why their overhead looks artificially lean. Use a market rate for your management function ($150-200K for a $5M company) and allocate it properly — your overhead rate will be more accurate, and your true profitability picture will be more honest.

Q: How do I reduce overhead without cutting people? A: The fastest wins are usually in three places: (1) vehicle costs — refinancing trucks, shopping commercial vehicle insurance, and optimizing the fleet size relative to billable vehicles versus overhead vehicles; (2) unbilled software and subscriptions that have accumulated over years without regular audit (most companies find $5-15K in unused subscriptions); and (3) properly reclassifying costs that should be job-coded but are sitting in overhead because nobody set up the category. Real headcount-driven overhead reduction requires revenue growth (the same cost becomes a smaller percentage of a bigger number) or genuine work elimination, which is harder.

Q: How does overhead rate affect my bonding capacity? A: Directly. Surety companies look at your overhead rate as part of underwriting — a bloated overhead signals management risk. Low overhead signals lean operations that may not have the infrastructure for large projects. The sweet spot is overhead that's appropriate for your volume and work type. For more on the financial metrics that drive bonding, see bonding capacity financial playbook.

Ready to see where your money is going?