The overhead rate formula
Overhead is what the business spends to stay open whether or not a job is running. An overhead rate turns that yearly total into a number you can carry into a bid. This calculator gives you three rates from the same total:
Overhead % of direct cost = annual overhead ÷ annual direct job cost
Overhead % of revenue = annual overhead ÷ annual revenue
Overhead per field hour = annual overhead ÷ annual field labor hours
Each is a plain division, so each is only as good as its two numbers, which must cover the same twelve months.
How to calculate overhead rate, with a worked example
The calculator opens on an example year, the one in our overhead rate worksheet. Every figure is an example you replace with your own.
| Line | How it is worked out | Result | |---|---|---:| | Annual overhead | Ten cost lines added up | $213,000.00 | | Percent of direct cost | $213,000 ÷ $1,600,000 | 13.31% | | Percent of revenue | $213,000 ÷ $2,000,000 | 10.65% | | Per field hour | $213,000 ÷ 18,000 hours | $11.83 | | Monthly overhead | $213,000 ÷ 12 | $17,750.00 | | Overhead on a $48,000 job | $48,000 × $213,000 ÷ $1,600,000 | $6,390.00 |
To work out your own rate:
- Add up a year of overhead. The list below shows what to include.
- Forecast the same year: direct job cost, revenue and field labor hours.
- Divide the overhead by each forecast. A blank or 0 forecast leaves that rate empty rather than guessing one.
- To price one job, multiply the job's direct cost by the percent-of-direct-cost rate.
The calculator shows each division with your numbers. Copy link saves them in the link, not on our servers.
What to count as overhead
Count a cost when the business pays it whether or not a job is running and no job is charged for it. The worksheet lists ten lines:
- Office rent and utilities
- Office and admin salaries
- Owner's pay not charged to jobs
- Insurance not charged to jobs
- Vehicles and fuel not charged to jobs
- Phones, software and IT
- Accounting and legal
- Marketing and advertising
- Licenses, dues and training
- Small tools and shop
Count each dollar once
If a cost is already charged to a job, it sits in that job's direct cost. Leave it off the overhead list, or the same dollars count in both places and the rate comes out too high.
The worksheet has four blank lines for anything the list leaves out, and its total is the annual overhead figure to type here.
How to use the rate in a bid
The rate you carry into a price has to match the base it was divided by. Overhead as a percent of direct cost is applied to a job's direct cost, which is what the "Overhead to add to this job" line does. Our bid price calculator asks for overhead as a percent of direct cost, so the first rate here goes straight into it.
The other two rates fit other bases: a percent of revenue shows what share of each billed dollar went to keeping the business open, and a rate per field hour suits work priced by the labor hour. Do not apply one rate to the base of another.
Profit comes after overhead, as a separate step. The guide to markup vs margin shows where overhead sits in a price.
About the example figures
The starting numbers are the worksheet's worked example, not a typical year or a target, and nothing on this page says what your overhead should be. The math is division, and the only inputs are yours.
FAQ
What is the overhead rate formula?
Annual overhead divided by a base from the same year. For overhead as a percent of direct cost, the base is annual direct job cost; for a rate per hour, it is annual field labor hours. In the example, $213,000 ÷ $1,600,000 = 13.31%.
How do I calculate my overhead rate?
Add up a year of overhead costs, forecast the same year's direct job cost, revenue and field hours, and divide the overhead by each.
Should overhead be a percent of direct cost or of revenue?
Either is arithmetic on the same total. Use the one that matches how you price. The bid price calculator asks for overhead as a percent of direct cost, so that is the rate to carry into it.
What if I do not know my revenue or field hours yet?
Leave the field blank. That one rate stays empty, and the others still work.
Does the overhead rate include profit?
No. It is cost only. Profit is added after overhead, as a markup or a margin, when you price the job.
Related tools
- Bid price calculator: asks for the overhead percent this page gives you, then prices the job with a target margin.
- The free overhead rate worksheet adds the cost lines up line by line, in Excel, with the same three rates.