The overhead rate is the multiplier that converts estimated direct costs into a bid price that covers everything the business spends — including the costs that never touch a job site. Getting it right requires actually calculating what overhead costs, not estimating or benchmarking against industry averages. Your overhead is your business — it's shaped by your office lease, your fleet size, your estimating capacity, and your management structure. An industry benchmark for overhead rate doesn't account for any of that.
Construction time tracking software plays a specific role here: overhead labor — estimating hours, project management time in the office, driving between jobs, shop time, safety administration — must be tracked separately from direct project labor to measure what overhead actually costs. A construction time keeping app that captures overhead time codes alongside project cost codes gives the PM the data to calculate an accurate overhead rate — and to see whether current projects are recovering it.
Overhead = all costs required to operate the business that are not directly attributable to a specific project.
Direct costs = labor, materials, equipment, and subcontractors that can be charged to a specific job and cost code.
The line between direct and overhead isn't always obvious in construction. Clarify it project by project.
Clearly overhead (indirect):
Project overhead (sometimes called "general conditions"): These costs are incurred for a specific project but aren't tied to a specific scope item. They're typically broken out in the schedule of values rather than absorbed into overhead rate:
Project overhead goes into the bid as a direct line item. General overhead gets recovered through the overhead rate applied to direct costs.
Costs that don't change with revenue volume:
Fixed overhead must be recovered whether the company does $1M or $5M in revenue this year. If fixed overhead is $300,000/year and revenue drops, the per-dollar-of-revenue overhead rate rises — each job must carry more overhead burden.
Costs that scale with business activity:
Variable overhead is easier to manage — it compresses when business slows. Fixed overhead creates the financial floor the company must cover regardless.
List every cost that isn't a direct project cost. Pull from the prior year P&L — construction profit and loss statement — adjusted for known changes (new lease, new hire, new insurance) in the current year.
Overhead cost worksheet:
GENERAL OVERHEAD — ANNUAL OCCUPANCY Office rent: $36,000 Office utilities: $4,800 Shop/yard rent: $18,000 Shop utilities: $3,600 Subtotal Occupancy: $62,400 PERSONNEL Owner salary (office portion): $80,000 Office manager: $55,000 Estimator (1 FTE): $72,000 Payroll taxes on above: $15,800 Health insurance (office): $22,000 Subtotal Personnel: $244,800 VEHICLES (non-project) Lease payments (2 vehicles): $14,400 Insurance: $4,200 Fuel and maintenance: $8,500 Subtotal Vehicles: $27,100 INSURANCE (base) General liability base: $18,000 Umbrella: $6,000 Professional liability: $4,500 Subtotal Insurance: $28,500 PROFESSIONAL FEES Accounting/CPA: $8,400 Attorney (retainer/general): $3,600 Subtotal Professional: $12,000 TECHNOLOGY Project management software: $6,000 Construction time tracking app: $2,400 Accounting software: $1,800 Estimating software: $3,600 Other subscriptions: $1,200 Subtotal Technology: $15,000 MARKETING Website and SEO: $9,600 Advertising: $6,000 Business development: $4,800 Subtotal Marketing: $20,400 MISCELLANEOUS Office supplies: $2,400 Training and certifications: $4,800 Dues and memberships: $2,400 Bank fees and interest: $3,600 Small tools replacement pool: $6,000 Subtotal Misc: $19,200 TOTAL ANNUAL OVERHEAD: $429,400 This is the number the business must recover from project revenue before any profit is made.
Three methods — pick the one that fits how you bid.
Best when: Labor is the primary cost driver; labor hours are accurately tracked.
Overhead Rate = Annual Overhead ÷ Annual Direct Labor Cost $429,400 ÷ $1,200,000 = 35.8% of direct labor How to apply: On every estimate, after calculating direct labor cost, multiply by the overhead rate to get the overhead allocation.
Example: Direct labor estimate = $85,000 Overhead allocation = $85,000 × 35.8% = $30,430
Accuracy depends on accurate labor cost tracking. If direct labor hours — and therefore dollars — are understated because workers aren't using the construction employee time tracking app consistently, the denominator is wrong and the rate is miscalculated.
Best when: Labor is not the dominant cost; materials and subs are large relative to labor.
Overhead Rate = Annual Overhead ÷ Annual Total Direct Cost $429,400 ÷ $3,800,000 = 11.3% of total direct cost How to apply: On every estimate, after calculating total direct cost (labor + materials + equipment + subs), multiply by 11.3%.
Risk: If subcontract cost is high (GC passing through sub costs), this rate over-allocates overhead to jobs heavy with sub cost — where the GC's actual overhead involvement is low.
Best when: Bidding on T&M or unit price work where hourly rates must fully load overhead.
Overhead Rate = Annual Overhead ÷ Annual Billable Labor Hours $429,400 ÷ 18,500 hours = $23.21/direct labor hour How to apply: The fully loaded hourly labor rate = base wage + burden + overhead rate.
Example for a journeyman carpenter:
Base wage: $32.00/hr Payroll burden: $8.50/hr (FICA, WC, benefits) Overhead per hour: $23.21/hr ------ Fully loaded cost: $63.71/hr Markup (15%): $9.56/hr T&M billing rate: $73.27/hr Construction time keeping software tracks total billable hours — the denominator for Method 3. When field hours are captured accurately by contractor time tracking app, the calculation uses real data instead of estimated annual hours.
Overhead includes not just costs like rent and insurance but also labor time that isn't charged to a project. If this time isn't tracked, it's invisible — the PM doesn't know how many hours the estimator spent, how much time the superintendent drove between sites, or how much project management time was overhead vs. project-direct.
Overhead time codes in construction time tracking app:
OVERHEAD TIME CODES OH-100: Estimating OH-200: Project management (not billable to project) OH-300: Drive time (between sites, to supplier, non-project) OH-400: Safety administration OH-500: Training OH-600: Business development / marketing OH-700: Shop and yard work OH-800: Equipment maintenance OH-900: Administrative / meetings Why this matters:
When a superintendent splits time between 3 active projects and general coordination, their salary must be split: billable time to each project (direct cost), non-billable coordination time to overhead. Without time tracking by cost code, the entire superintendent salary goes to overhead — overstating overhead. Or the entire salary gets allocated to one project — understating that project's margin and overstating others.
GPS time tracking confirms overhead vs. project time. A superintendent clocked to OH-300 (drive time) on a route between two project sites, rather than to either project, accurately reflects overhead time. GPS records confirm the location — the system allocates correctly without manual judgment.
Calculating an overhead rate is only half the job. The other half is verifying that actual projects recover it.
Overhead recovery = overhead allocated to projects ÷ total overhead incurred
Underrecovery: Projects didn't generate enough revenue to absorb all overhead. The business ran at a loss (or lower margin than planned).
Overrecovery: Projects absorbed more overhead than was incurred — margin is higher than planned.
Project-level overhead check:
For each completed project, compare:
A project where labor ran 20% over budget also underrecovered overhead — because more of the overhead-generating resource (labor) was consumed than the revenue recovered.
The WIP report connection: Construction WIP reporting tracks over/under billing by project. An underrecovered overhead position shows in the WIP as a gap between earned revenue and billed-to-date that compounds across projects.
Not including owner salary Owner compensation is often the largest single overhead item and the one most frequently left out. An owner who "pays themselves from profit" is effectively working for free on every project — sustainable until it isn't. Owner salary belongs in overhead.
Using industry benchmarks instead of actual costs "Industry overhead is 10–15% of revenue" doesn't account for the company's actual structure. A GC heavy on self-perform labor has higher overhead as % of labor than one that subs everything. Calculate from the actual P&L.
Not updating annually Overhead rates calculated 3 years ago don't reflect current costs. Rent increased, hired two people, added software subscriptions. Recalculate at the start of every fiscal year — and mid-year if major costs change.
Mixing project overhead and general overhead Project superintendent salary, job trailer, and temporary facilities are project overhead — they go in the estimate as direct line items, not in the overhead rate. Including them in the overhead rate double-counts them when the estimate also has a general conditions line.
Not tracking overhead labor hours Without overhead time codes in the construction employee time tracking app, overhead labor (estimating, PM, shop, drive time) is invisible. It shows up as overhead cost on the P&L but the hours behind it aren't tracked — making it impossible to know whether the overhead rate accurately reflects overhead labor content.
Applying overhead rate to subcontract cost When a GC subs 70% of project cost, applying the overhead rate to subcontract cost massively inflates the bid. Overhead is incurred managing self-perform labor and running the office — not administering sub invoices. Consider applying a lower rate (or GC markup only) to subcontract cost and the full overhead rate to self-perform labor only.
OVERHEAD RATE CALCULATION SUMMARY Annual Overhead: $429,400 Annual Direct Labor Cost: $1,200,000 Annual Billable Hours: 18,500 hrs Annual Total Direct Cost: $3,800,000 Method 1 — % of Labor: 35.8% Method 2 — % of Total Cost: 11.3% Method 3 — $/Direct Labor Hour: $23.21/hr BIDDING APPLICATION (Method 1 example) Estimated direct labor: $85,000 Overhead allocation (35.8%): $30,430 Estimated materials: $42,000 Estimated subs: $180,000 Estimated equipment: $12,000 -------- Total direct + overhead: $349,430 Profit margin (12%): $47,657 -------- BID PRICE: $397,087 TaskTag Features
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