There are many different ways to calculate your overhead and profit, but we’re going to look at the most common methods.
Determine your construction overhead and markup
To calculate your construction overhead, add up the monthly fixed costs of running your business. Some find it easier to add up your annual costs and then divide them by 12 to get your monthly expenses. The resulting figure is the amount of money you must make each month to keep your business alive.
Note that your overhead does not include any direct project costs, such as materials or payroll for field teams or other labor. That’s because you’ll only have those costs if you have work to do.
Once you’ve calculated your monthly overhead, you can determine your markup. This is a percentage to add onto project estimates to cover overhead and keep your projects profitable. There are two different methods of doing this: by labor cost and by sales.
1. By labor cost
To calculate your construction overhead by labor cost, divide your monthly overhead by your monthly labor costs. This figure tells you how much of each dollar goes toward overhead.
Example A:
Let’s use some real numbers as an example. Imagine you have monthly overhead costs of $600 ($200 insurance + $200 utility bills + $200 office supplies), and you’re the only employee. Let’s say you pay yourself $15/hour and work 40 hours/week ($2400/month).
What does this mean? For every dollar you make, $.25 goes straight to overhead.
If you have multiple employees, your overhead percentage will decrease because you’ll be able to spread your overhead across more projects as you take on more work.
Since you have more crew members doing more work, you can afford to spread out your overhead costs across more projects.
Note: This equation just shows what you need to charge on top of projects to cover your overhead fees. It doesn’t include any profit margins you want to incorporate.
Example B:
Let’s say your overhead costs are $600/month, and you have two full-time employees: yourself and someone else.
With that calculation, you know you should be adding at least 12.5% to your labor costs to cover overhead.
Now, say you get two renovation projects that’ll take around two days each.
Using your calculation above, your total overhead markup will be $60 so that you at least break even on costs.
If you take yourself away from the manual work to help with the business side of things, your own labor cost becomes overhead, which increases your overhead markup. Let’s go to example C to demonstrate this.
Example C:
Let’s say you want to shift from billable construction work to office work instead. Your time then shifts into an overhead cost because it isn’t going into a project with a dollar amount on it.
Your overhead costs include:$200 insurance+ $200 utility bills+ $200 office supplies+ $1,200 (your own cost of $15/hour x 20/week)= $1,800/month
Your labor costs are $2,400/month because you pay someone $15/hour for 40 hours/week.
You’d need to hire additional labor to reduce this markup or dedicate your spare 20 hours per week back on-site.
2. By sales
Let’s say you have a full-time team that is paid the same amount every month, but they do different amounts of billable work each month. In this case, you may want to calculate your construction overhead by sales.
To calculate your overhead by total sales, divide your monthly overhead by your average monthly sales. This figure is your overhead markup percentage, which you add to a project estimate based on the cost of that project.
Example A:
In this example, let’s say your overhead costs are $600/month ($200 insurance + $200 utility bills + $200 office supplies). Your sales are $5,000/month. Here’s how you’d calculate your overhead markup:
That means if Project 1 will cost you $1,000, you need to add an overhead markup of $120 ($1,000 x 12%).
If you have multiple employees, your average monthly sales will increase, and your overhead markup will decrease because you’ll be able to spread your overhead costs across more projects.
Example B:
Let’s say your monthly costs are the same, but your average sales are $10,000/month.
For the same Project 1 with costs of $1,000, you’d need to add $60 ($1000 x 6%).
It’s also essential to remember that your overhead cost isn’t a one-time calculation. Business expenses can increase as well as decrease, so it’s crucial to re-calculate at least twice a year.
