How to Calculate Your Overhead Markup as a Contractor

Most home service owners set their markup based on what competitors charge, what a coach told them years ago, or what "feels right" for their market. The result is a business that looks profitable on a good month and feels tight every month without a clear reason why. The reason is usually that the overhead structure was never built into the pricing.

This post walks through the exact calculation: how to identify overhead, how to convert it to a per-hour cost, and how to add it to your labor and materials to arrive at a price that actually covers the business.

What Counts as Overhead (and What Doesn't)

The first step most contractors get wrong is the definition of overhead. Overhead is not everything the business spends. Overhead is specifically the costs that are not directly tied to completing a specific job.

Overhead includes:

• Truck payments and lease costs (not fuel, which is job-direct)
• Insurance premiums: general liability, commercial auto, workers comp (workers comp on techs can be allocated as a labor burden, but small shops often carry it as overhead)
• Shop rent or home office cost
• Tools and equipment purchases spread over useful life
• Admin and CSR salaries
• Software subscriptions: CRM, scheduling, accounting, call tracking
• Advertising and marketing spend
• Owner salary to the extent it is not directly on a job
• Licenses, permits, and professional memberships

Overhead does not include:

• Materials and parts purchased for a specific job (these are job-direct costs)
• Direct labor hours spent on a job (these are a separate line in the calculation)
• Fuel and vehicle expenses tied to specific jobs in some accounting treatments (many shops classify these as overhead and that is fine, just be consistent)

The goal is a clean separation between "what did it cost us to complete this specific job" and "what does it cost to run the business regardless of how many jobs we do."

Text Clint: "What is my total monthly spend on software subscriptions, insurance, admin salaries, and vehicle payments for the last 3 months?"

The Calculation Step by Step

Step 1: List every overhead cost and total the monthly amount.

Go line by line through your expense account and categorize every recurring cost. For annual costs like insurance renewals or license fees, divide by 12. For irregular costs like equipment repair, use a 12-month trailing average. Build a single monthly overhead total.

Example shop: 3 techs, $2.1M annual revenue.

Step 2: Calculate total available tech hours per month.

Count your billable techs. Multiply by available working hours per month. A typical calculation is 4.3 weeks per month × 40 hours per week = 172 available hours per tech per month.

3 techs × 172 hours = 516 available hours per month.

Step 3: Apply your utilization rate.

Utilization rate is the percentage of available tech hours that are actually spent on billable jobs. A tech who is available for 172 hours but spends 30 hours per month on drive time, shop time, training, and non-billable activity has a 74% utilization rate and 127 billable hours.

Most residential trade shops run 65-80% utilization. New shops run lower. Shops with strong scheduling run higher. See how to track technician utilization rate for the measurement loop.

At 75% utilization: 516 available hours × 0.75 = 387 billable hours per month.

Step 4: Calculate overhead cost per billable hour.

Divide total monthly overhead by total monthly billable hours.

$18,930 overhead / 387 billable hours = $48.91 overhead per billable hour.

Round to $49 for practical use.

Step 5: Build the job break-even price.

For any job, the break-even price is:

(Burdened labor rate × job hours) + (parts cost × parts markup multiplier) + (overhead rate × job hours)

At $45/hour burdened labor + $49/hour overhead = $94/hour all-in cost before profit.

Add parts cost at your markup. At 35% parts markup: $100 in parts becomes $135 on the invoice.

A 2-hour job with $100 in parts: (2 × $94) + $135 = $323 break-even.

To hit 20% net margin: $323 / 0.80 = $404 target price. To hit 25% net margin: $323 / 0.75 = $431 target price. The fuller break-even view is in how to calculate break-even for home service; for job-level allocation, job costing for contractors.

Text Clint: "What is my average billable hours per tech per month for the last quarter, and what is my actual utilization rate compared to available hours?"

How Utilization Rate Changes Your Overhead Per Hour

Utilization rate is the most under-appreciated variable in the whole calculation. A 10-point change in utilization rate moves overhead per billable hour by a significant amount.

Using the same $18,930 monthly overhead and 516 available hours:

A shop at 60% utilization needs to charge $61 per hour just to cover overhead. The same shop at 90% utilization needs only $41 per hour. The 30-point utilization difference is a $20/hour gap on overhead alone.

This is why a shop with idle capacity cannot simply match a competitor's pricing and stay profitable. If the competitor is running at 85% utilization and you are running at 65%, they can charge less per hour and still cover overhead. You cannot.

The fix for low utilization is not lower prices. It is filling the schedule. Every hour a tech drives to a job, picks up supplies, or waits for parts is an hour you are paying for but not billing. See how to improve route density for the scheduling-side levers.

What to Do When Overhead Per Job Is Higher Than Expected

When contractors run this calculation for the first time, the most common reaction is "that cannot be right." The overhead per billable hour comes out at $50-$70 and it feels impossibly high.

It is usually right. The costs are real. The question is what to do with the number.

Three options, in order of impact:

Raise prices. Most contractors are underpriced relative to their actual cost structure. If your overhead per billable hour is $52 and your current pricing was built assuming $30, you are losing $22/hour in margin on every job. A 15-20% price increase on standard service calls is often the fastest path to sustainable margin, particularly if your close rate is above 65% (which indicates you have room on price). See how to raise prices without losing customers for the rollout mechanics.

Improve utilization. Scheduling efficiency, better route density, and parts pre-loading before dispatch all move utilization rate. The math above shows the impact. Moving from 65% to 80% utilization on 3 techs at $18,930 monthly overhead saves $16/hour in overhead per billable hour.

Reduce overhead. This is the hardest lever and the one that creates the most operational risk. Cutting the CSR or deferring truck maintenance lowers overhead nominally but often raises cost elsewhere. Advertising cuts lower overhead but reduce pipeline. Tackle overhead reduction last and specifically: look for line items that are not generating proportional value before cutting anything that is.

Text Clint: "What are my total monthly overhead costs for the last 3 months, and how has my billable hours per month changed over the same period?"

Setting Markup vs. Setting Price

A markup percentage and a target gross margin are not the same number, and confusing them is the most common pricing error in residential trades.

A 40% markup on a $100 part means you charge $140. The markup is applied to cost.

A 40% gross margin on a job means you keep 40% of the invoice as gross profit. Gross margin is expressed as a percentage of revenue, not cost.

The conversion: a 40% gross margin requires a 67% markup on cost. A 50% gross margin requires a 100% markup on cost.

When a shop says "I mark everything up 30%," they are running approximately a 23% gross margin on materials. That is not the same as a 30% gross margin on the job.

For a full-job pricing approach, stop thinking in markup percentages and think in target gross margin. Decide the gross margin you need for the business to hit its net income target. Calculate break-even job cost using the steps above. Divide by (1 minus target gross margin) to get the minimum bid price.

Sources

• Contractor Dynamics: How to Calculate Your Overhead and Markup
• The Contractor Fight: True Cost Per Hour for Contractors
• Profit Rhino: Flat Rate Pricing and Overhead Allocation
• Hatch: Home Services Labor Rate Calculator
• ACCA: Business Management for HVAC Contractors
• ServiceTitan: Job Costing for Home Service Businesses