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.

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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.

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Overhead Benchmarks by Company Size

The size bands below are Level operator planning ranges, not measured CFMA, ACCA or FMI size-cohort percentiles. Use consistent direct-cost and overhead definitions before comparing them with your books. The Level Index publishes separate cross-trade metrics with their own samples; it does not establish these overhead bands.

$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. A 22-25% overhead assumption can be a starting scenario, not an independently verified HVAC median.

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, $350K 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.

For a low-overhead planning scenario at $15M+, test 14-16% against the actual costs and required management capacity. It is not a sourced best-in-class cohort. The operating design might include:

• 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.

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Why Overhead Percentage Matters for Pricing

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

The denominator determines the pricing calculation. If overhead is 28% of revenue, every revenue dollar must leave 28 cents for overhead. At break-even before profit, the equivalent overhead markup on direct cost is 0.28 / 0.72 = about 39 cents per direct-cost dollar.

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 = $322.58 (about $323)

So the illustrative billable price for that $200 job is about $323 to recover overhead and leave 10% operating profit before any separately excluded interest or tax. At $240, the $40 contribution falls short of the allocated overhead and profit targets; the assumed 28% overhead is $67.20, leaving -$27.20 after that allocation. This is a fictional cost-basis calculation, not a statement that the job loses cash before overhead.

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. In the same fictional pricing model, reducing overhead from 28% to 22% changes the price from $200 / 0.62 = $322.58 to $200 / 0.68 = $294.12, about $323 to $294. That assumes the lower overhead rate is supportable; it is not a promised reduction timeline. Suddenly you're more competitive on pricing without cutting margin, or you're more profitable at the same price.

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The Three Overhead Categories That Catch Contractors Off Guard

1. Vehicle Costs (Check the Full Cost Basis)

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

• Depreciation on the profit-costing basis, plus applicable interest. Track loan principal separately in cash planning, without counting it again as an expense
• Commercial vehicle insurance
• Fuel from actual fleet records, rather than a personal-vehicle estimate
• 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, depreciation or interest in another expense account; loan principal stays in the cash schedule) 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.

Use the actual carrier premium, covered payroll, classifications and experience modifier. For illustration, a $500K covered payroll at an assumed 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.

Classify field-labor WC in labor burden or job cost when allocated to jobs; office or other indirect-payroll WC belongs in overhead. Do not count it twice. In the fictional $5M revenue example, omitting $50K changes the relevant cost ratio by $50K / $5M = one percentage point.

The good news: EMR is manageable. Review claims and safety controls with the carrier or qualified adviser; they do not guarantee a particular EMR change. If the assumed base premium is $50K and only the multiplier changes from 1.3 to 0.9, the illustrative premium difference is $20K. Actual pricing includes other factors, and the saving belongs in the cost category where the premium was allocated.

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. Measure this share from approved timecards. A 5-15% share is an illustrative planning range, not a verified field-service distribution. Classify the relevant paid time consistently as job cost, labor burden or overhead according to its purpose.

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 may remain in a general payroll line. Confirm its allocation so it is counted once in the relevant job cost, burden or overhead basis.

The fix: use your field service software to categorize non-billable activities separately. Create codes for "Shop/Administrative," "Training," "Vehicle Maintenance," etc. Allocate each code to job cost, burden or overhead under the approved policy, counting its cost once.

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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).

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Connecting Overhead to the Full P&L

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

Gross margin - Operating overhead rate = Operating margin (with a common revenue denominator; interest and tax may need separate deductions)

In a fictional $5M contractor scenario:

• Gross margin: 43%
• Overhead: 28%
• Operating margin: 43% - 28% = 15%, because both ratios use revenue as the denominator.

The fictional example reconciles as follows:

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

Operating profit = Gross profit - Operating overhead = $2.15M - $1.4M = $750K = 15% of revenue, before separately excluded interest and tax.

The 15% result belongs to this example. The 10% pricing target and a 10-12% profit sensitivity are separate planning inputs, not measured size-cohort benchmarks. The result must be compared on the same accounting basis. 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.

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

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

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

Compare your number to the benchmarks:

• $1-3M revenue: 25-35% overhead. Above the illustrative 35% band, categorize costs and test which support the actual workload
• $3-10M revenue: 20-28% overhead. Above the illustrative 30% band, categorize costs and review actual workload before identifying a cause
• $10M+ revenue: 15-22% overhead. Above the illustrative 25% band, test the cost basis and capacity rather than assuming that scale should have lowered cost

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).

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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 role- and location-comparable management cost (a fictional $150-200K range for a $5M company is only a planning input) 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 (test a fictional $5-15K annual savings scenario against actual unused subscriptions; it is not a measured company norm); 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: Overhead is one part of the financial statements a surety may review. It does not determine bonding capacity alone. Ask your surety how expense classification, working capital, equity and WIP support affect its assessment; there is no universal overhead sweet spot that guarantees capacity. For more on the financial metrics that drive bonding, see bonding capacity financial playbook.