What Is Overhead in Construction?

March 14, 2024

Overhead costs are a fact of life for every business, but construction contractors need to manage overhead expenses even closer than other businesses. Whether you’re a general contractor or a specialized craftsperson, accurate overhead estimation and forecasting is key to running a profitable business and ensuring your bids are competitive. Overhead can seem daunting because there are several types of overhead and different calculations for each. It’s important to understand all the types of overhead so that you can accurately plan for and manage your construction business expenses.

The first and most obvious type of overhead in construction is direct. This includes materials, equipment rental, parking fees, permits, subcontractors, court fees, fines, mobilization costs, and any other expense directly related to a specific project. The other type of overhead is indirect, and it covers recurring expenses like insurance, office rent or mortgage, utilities, and any other expense that’s not related to a specific project. This type of overhead can be more difficult to nail down, as it can vary widely from one company to the next.

A common way to estimate overhead is to divide total annual business expenses by the amount of work the company does in a year. For example, if your business has $50,000 in expenses each year and does $200,000 of work, your overhead rate would be $50,000 / $200,000 = 25%. While this is a rough estimate and doesn’t take into account the fact that some projects may experience more overhead than others, it gives you a good starting point for estimating your overhead rates.

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