Overhead is every cost you pay to run your business that isn’t tied directly to a specific job. It’s real money going out the door, and if your bids don’t account for it, you’re losing money on jobs that look profitable on paper.

Start by listing your indirect costs. These include office rent and utilities, general liability insurance, vehicle costs that aren’t job-specific, office staff salaries, equipment maintenance, licensing and bonds, marketing, software subscriptions, phone bills, and professional fees like accounting and legal. Workers comp is sometimes direct and sometimes overhead depending on how you track it.

Add up those costs for a full year. Use last year’s actual numbers if you have them, or build a realistic estimate if you’re newer. Let’s say your annual overhead comes to $120,000.

Next, pick your allocation base. The two most common methods are percentage of direct labor costs and percentage of total direct costs. Direct labor means wages paid to workers actually doing work on job sites. Total direct costs includes labor plus materials plus subcontractor payments.

If your annual direct labor costs are $300,000, your overhead rate would be $120,000 divided by $300,000, which equals 40%. That means for every dollar of labor on a job, you need to add 40 cents to cover overhead.

Some contractors prefer allocating based on total direct costs because it spreads overhead more evenly across jobs that are material-heavy versus labor-heavy. If your total direct costs are $800,000 annually, the overhead rate would be 15%. Either method works as long as you’re consistent.

When bidding a job, calculate your direct costs first. Labor, materials, subcontractors, permits, and equipment rental specific to that project. Then apply your overhead rate. A job with $25,000 in direct costs using a 15% overhead rate adds $3,750 to cover your indirect expenses. Then add your profit margin on top.

The mistake many contractors make is guessing at overhead or using an industry average they heard somewhere. Your overhead is specific to your business. A contractor running a small operation out of their garage has different overhead than someone with an office in Kearny Mesa and three estimators on staff. Using someone else’s number means you’re either leaving money on the table or pricing yourself out of work.

Track your actual overhead monthly and compare it to what you estimated. If you budgeted $10,000 monthly but you’re actually spending $12,000, your overhead rate is too low and you’re underpricing jobs. Working with a San Diego bookkeeper who understands construction helps you catch these gaps before they eat into your profit.

Construction job costing done properly lets you see whether your overhead allocation matches reality once jobs are complete. You’ll know which types of projects actually make money and which ones just kept the crew busy. That information shapes better bids going forward.

Review your overhead rate at least once a year. Insurance costs change, rent goes up, and your business grows or shrinks. The percentage that worked last year might be off this year. Accurate overhead calculation isn’t a one-time exercise. It’s part of running a profitable construction business.