Overhead and profit in construction: how to work out your rate and price it into a job

What overhead and profit means in construction

Overhead and profit in construction, often written OH&P, is the amount a builder adds to the direct cost of a job. Overhead pays for the parts of the business no single job owns: the office, the owner's management time, accounts, insurance, vehicles, software, and the time spent pricing work you don't win. Profit is what remains after every cost is paid, and it is what funds the next slow month, new equipment and the owner's return on the risk taken.

The two are often quoted together as one percentage, but they behave differently. Overhead is a cost you will have whether or not you win the job. Profit is a choice you make in the price, and the first thing to shrink when overhead isn't covered. Keeping them separate is what lets you see which one went wrong.

Job overhead vs company overhead (general conditions and preliminaries)

The most common mistake is counting the same cost twice, or not at all, because "overhead" means two things. Job overhead is the cost of running one particular site; company overhead is the cost of running the business.

UK practice keeps the two apart for the same reason: the RICS New Rules of Measurement put preliminaries in their own section of a cost plan, separate from overheads and profit (Designing Buildings, RICS NRM). Whatever your country calls them, price job overhead in the estimate and recover company overhead with the rate below.

Step 1: List a year of company overhead

Start from last year's accounts and next year's plan, not from a percentage you heard. Here is a small builder that plans $1.2 million of work next year, with sample figures:

Step 2: Work out your overhead rate on cost, revenue or labour hours

An overhead rate is company overhead divided by a base. Three bases are common, and each gives a different number for the same overhead. The builder above plans $1,200,000 of revenue from $900,000 of direct job cost, and its crews will work about 30,000 hours.

Direct cost is the usual base for builders who buy most of the material themselves. Labour hours suit trades whose cost is mostly their own crews. The base matters less than using one consistently: estimating with "15%" on direct cost when your 15% was worked out on revenue under-recovers a quarter of your overhead.

Converting between overhead on cost and overhead on revenue

Most published overhead percentages don't say which base they use, and most guides that show more than one base don't connect them. The conversion is simple once you know what share of revenue your direct cost is:

• Overhead % of revenue = overhead % of direct cost × (direct cost ÷ revenue).
• Overhead % of direct cost = overhead % of revenue ÷ (direct cost ÷ revenue).
• In the example, direct cost is 75% of revenue, so 20% of cost × 0.75 = 15% of revenue, and 15% of revenue ÷ 0.75 = 20% of cost.

Use this before comparing your rate with anyone else's. A builder who says "our overhead is 12%" on revenue may carry the same overhead as one who says 16% on cost.

Step 3: Price overhead and profit into a job

Take a house the builder above is pricing. The estimate's direct cost, including $18,000 of general conditions for that site, is $240,000. The target is 10% profit on the selling price.

1. 1Direct cost.
   Material, labour, subcontracts, plant and the job's own general conditions: $240,000.
2. 2Add company overhead at 20% of direct cost.
   $240,000 × 20% = $48,000, so cost with overhead is $288,000.
3. 3Add profit as a margin on the price.
   Price = $288,000 ÷ (1 − 10%) = $320,000. Profit is $32,000, which is 10% of $320,000.
4. 4Check.
   Overhead of $48,000 is 15% of the $320,000 price, matching the revenue-based rate. The total markup on direct cost is $80,000 ÷ $240,000 = 33.3%.

Step 3 divides by (1 − margin) because profit was set as a share of the price. Adding 10% to cost instead would give a 9.1% margin. The markup vs margin section of the estimating guide covers the difference, and the same guide covers contingency, which is a separate allowance for risk, not overhead or profit.

What overhead and profit percentages are typical

Few overhead and profit benchmarks are published with a method. One that is: the US National Association of Home Builders' Cost of Doing Business Study, 2025 edition, which reports single-family builders' 2023 results.

Sources: NAHB press release and NAHB Eye on Housing. These are averages for US single-family home builders, so treat them as a sense check, not a target. In the sample above, overhead of 15% of revenue and a 10% net margin would sit above the NAHB averages on both, which is a prompt to check the overhead list and the price, not proof that either is wrong.

The figure that matters is your own: last year's overhead divided by last year's base. A benchmark tells you which questions to ask; it can't tell you what your office costs.

When work slows down: under-recovered overhead

Overhead is mostly fixed, but you recover it as a percentage of jobs. If the work doesn't arrive, the percentage doesn't cover the cost. Using the same builder:

A quarter less work halved the profit, because $45,000 of overhead had no job to pay for it. The options are to cut overhead, win more work, or raise the rate for the jobs you do win, and each has a cost. Knowing the number early is what gives you the choice, which is why a mid-year check against plan matters.

Overhead and profit on changes and variations

Extra work ordered during the job also carries overhead and earns profit. Many contracts set the percentage allowed on changes, or say how it is worked out; read that clause before pricing a variation, and price it with the same base as the original estimate. Record every approved change against the contract so the job's budget and your payment schedule move with it, and so the margin on the finished job can be checked against the margin you priced.

Recalculate twice a year, and check it against real jobs

1. 1Every six months, list overhead again from the accounts and divide by the base you use.
2. 2Update the rate in your estimating sheet or quotation tool the same day.
3. 3Set a minimum margin below which a quote needs the owner's approval.
4. 4After each job, compare the margin you priced with the margin you made. A job that went over budget eats profit first; construction budget vs actual and cost to complete show where it went.

For a first estimate to price from, the construction cost estimator produces a bill of quantities with material and labour you can add your overhead and profit to.