Overhead is what it costs to run the company, as opposed to running a job. It includes office rent and utilities, executive and accounting salaries, estimating, IT and software, marketing, company vehicles not charged to jobs, and professional fees. Job-specific costs like the superintendent and site trailer are general conditions, not overhead, though contractors draw the line in different places.
Why it matters
Every job’s gross profit has to cover a share of overhead before the company earns a dollar of net profit. Estimators usually apply an overhead and profit markup (often called OH&P) to cost. If that markup is set without knowing actual overhead as a percentage of revenue, the company can win plenty of work and still lose money. Overhead also matters when revenue drops: it doesn’t shrink as fast as volume.
Worked example
Illustrative: a contractor expects $90M in annual revenue and $6.3M in overhead, so overhead is 7% of revenue. A job bid at an 11.4% gross margin, like Riverside Medical Center, contributes 4.4 points toward net profit after its share of overhead. If revenue falls to $75M and overhead stays at $6.3M, overhead jumps to 8.4%, and the same jobs net far less.
Common mistakes
- Pricing jobs with a markup that doesn’t reflect actual overhead.
- Burying job costs in overhead, which makes job margins look better than they are.
- Treating overhead as fixed when planning growth that needs more estimators and PMs.
How os.construction handles it
We’re building company-level reporting that sets overhead next to portfolio gross profit from live job data, so the break-even point is visible during the year, not only after it.