Glossary
Overhead
Also called: fixed costs · operating expenses · indirect costs
Overhead is the cost of existing — everything you would still pay next month if no work came in at all.
Rent, insurance, office and admin wages, software, truck payments, committed advertising, professional fees, licences and the owner’s management wage. None of it moves with the amount of work you do, which is precisely what makes it dangerous in a slow month.
Overhead is usually expressed as a share of revenue — annual overhead divided by annual revenue — so it can be applied to a quote. It can also be expressed per billable hour, which is more useful for service work and exposes something the percentage hides: overhead per hour rises when billable hours fall. Two quiet months and the same fixed cost has to be recovered across far fewer hours, which is exactly when contractors discount to stay busy and make the problem worse.
The figure worth watching is the trend rather than the level. Overhead as a share of revenue should fall as you grow, because most of it is fixed and revenue is not. Flat or rising while revenue grows means something that should be a fixed cost is behaving like a variable one.
Why it matters to a contractor
Every job has to carry a share of it, and a quote that does not include that share is a quote that loses money while looking profitable. It is also the number that decides your break-even.
Work it out on your numbers
See also