Overhead costs can make or break your construction bids. Too high, and you're not competitive. Too low, and you're losing money on every job you win. Understanding how to accurately calculate and allocate overhead is essential for profitable bidding.
Understanding Construction Overhead
What Is Overhead
Overhead represents the indirect costs of running your business and managing projects—expenses that don't directly install work but are necessary for operations.
Two Types of Overhead
Job Overhead (General Conditions)
- Project-specific indirect costs
- Temporary facilities, supervision, equipment
- Varies by project size and duration
- Relatively easy to estimate
Company Overhead (General & Administrative)
- Business operating costs
- Office, accounting, insurance, marketing
- Spread across all projects
- Requires allocation methodology
Job Overhead (General Conditions)
Common Job Overhead Items
Supervision and Management
- Project manager (allocated time)
- Superintendent
- Assistant superintendent
- Project engineer
Temporary Facilities
- Job trailer/office
- Temporary power
- Temporary water
- Temporary toilets
- Temporary fencing
Project Equipment
- Cranes and hoists
- Scaffolding
- Small tools and equipment
- Vehicles on site
Site Services
- Security
- Cleaning
- Waste management
- Traffic control
Administrative
- Project insurance
- Permit fees
- Testing and inspections
- Document reproduction
Calculating Job Overhead
Duration-Based Items
Monthly cost × Project duration = Total cost
Example: Job trailer
$800/month × 12 months = $9,600
Fixed Items
One-time costs regardless of duration
Example: Mobilization/demobilization
$5,000 (fixed)
Variable Items
Costs that scale with project size
Example: Temporary power
Base + (SF × rate)
$2,000 + (50,000 SF × $0.02) = $3,000
Job Overhead as Percentage
Typical Ranges
- Simple projects: 5-8% of direct costs
- Standard commercial: 8-12%
- Complex projects: 12-18%
- Renovation/occupied: 15-20%+
Factors Affecting Percentage
- Project duration
- Site complexity
- Owner requirements
- Location/access
Company Overhead (G&A)
Common G&A Expenses
Facilities
- Office rent/mortgage
- Utilities
- Maintenance
- Equipment and furniture
Personnel
- Executive salaries
- Administrative staff
- Accounting/HR
- Marketing/business development
Professional Services
- Legal fees
- Accounting/audit
- Insurance (company)
- Consulting
Operating Expenses
- Office supplies
- Technology/software
- Vehicles (non-project)
- Training and education
Marketing and Business Development
- Advertising
- Proposal costs
- Entertainment
- Association dues
Calculating G&A Rate
Annual G&A Calculation
Total Annual G&A Expenses
÷ Annual Revenue (or Direct Costs)
= G&A Percentage
Example:
$600,000 annual G&A
÷ $10,000,000 annual revenue
= 6% G&A rate
Allocation Base Options
| Base | Formula | Best For | |------|---------|----------| | Revenue | G&A ÷ Revenue | Simple application | | Direct Costs | G&A ÷ Direct Costs | Cost-based pricing | | Labor Hours | G&A ÷ Hours | Labor-intensive work | | Contribution | Weighted allocation | Varied project types |
Overhead Allocation Methods
Percentage of Direct Cost
Method Apply fixed percentage to direct costs
Calculation
Direct costs: $500,000
G&A rate: 6%
G&A allocation: $30,000
Pros/Cons
- Simple to apply
- May not reflect actual project demands
- Standard industry practice
Activity-Based Costing
Method Allocate based on project's consumption of resources
Calculation
Project requires:
- 200 PM hours × $50 = $10,000
- 50 accounting hours × $40 = $2,000
- Estimating cost: $5,000
Total allocation: $17,000
Pros/Cons
- More accurate allocation
- More complex to track
- Better for varied project types
Duration-Based Allocation
Method Allocate based on project duration
Calculation
Annual G&A: $600,000
Monthly G&A: $50,000
12-month project: $600,000 allocation
Pros/Cons
- Reflects time-based costs
- May overweight small long projects
- Useful for equipment allocation
Calculating Total Overhead
Combined Approach
Step 1: Calculate Job Overhead
- List all general conditions items
- Estimate each cost
- Sum for total job overhead
Step 2: Calculate G&A Allocation
- Determine appropriate base
- Apply company G&A rate
- Calculate allocation
Step 3: Sum Total Overhead
Job overhead: $85,000
G&A allocation: $30,000
Total overhead: $115,000
Example Calculation
Project Data
- Direct costs: $500,000
- Duration: 8 months
- Company G&A rate: 6%
Job Overhead Estimate | Item | Monthly | Months | Total | |------|---------|--------|-------| | Superintendent | $12,000 | 8 | $96,000 | | Job trailer | $800 | 8 | $6,400 | | Temp power | $600 | 8 | $4,800 | | Toilets | $300 | 8 | $2,400 | | Dumpster | $500 | 8 | $4,000 | | Subtotal | | | $113,600 |
| Fixed Items | | | | |------|---------|--------|-------| | Mobilization | | | $5,000 | | Final clean | | | $8,000 | | Testing | | | $3,000 | | Subtotal | | | $16,000 |
Total Job Overhead: $129,600 (25.9% of direct)
G&A Allocation $500,000 × 6% = $30,000
Total Overhead: $159,600 (31.9% of direct)
Competitive Overhead Pricing
Know Your True Costs
Track Actual Overhead
- Job cost by project
- G&A by period
- Compare to estimates
- Adjust rates over time
Benchmark Performance
- Compare to industry data
- Analyze winning vs. losing bids
- Identify efficiency opportunities
Strategies for Competitiveness
Reduce Job Overhead
- Efficient supervision ratios
- Shared resources between projects
- Technology investments
- Subcontract vs. self-perform decisions
Reduce G&A
- Office efficiency
- Technology leverage
- Volume growth (spread fixed costs)
- Process improvement
When to Adjust Overhead
Lower Overhead When
- High competition situation
- Strategic project pursuit
- Volume capacity available
- Efficient project conditions
Higher Overhead When
- Complex project demands
- Risk factors present
- Owner requires extra attention
- Difficult site conditions
Common Overhead Mistakes
Underestimating Job Overhead
Problem: Using rules of thumb without project analysis
Impact: Margin erosion, cash flow problems
Solution: Estimate each job overhead item specifically
Ignoring G&A
Problem: Pricing without accounting for company overhead
Impact: Apparent profit disappears to cover office
Solution: Always include G&A allocation in estimates
Inconsistent Application
Problem: Different methods on different projects
Impact: Some projects subsidize others
Solution: Standardize overhead allocation methodology
Not Tracking Actuals
Problem: Never comparing estimated to actual overhead
Impact: Perpetuating inaccurate estimates
Solution: Job cost tracking, periodic analysis, rate adjustment
Overhead Documentation
What to Document
In Your Estimate
- Job overhead line items
- G&A calculation
- Assumptions made
- Rate sources
For Future Reference
- Actual costs vs. estimate
- Lessons learned
- Rate adjustments needed
- Benchmark data
Conclusion
Overhead calculation requires balancing accuracy with practicality. The goal is pricing that covers your true costs while remaining competitive.
Build detailed job overhead estimates for each project rather than applying rules of thumb. Track your actual G&A costs and calculate a realistic allocation rate. Compare your estimates to actuals and refine your approach over time.
The contractors who understand their overhead costs can price intelligently—competitive when needed, protective when appropriate. That understanding comes from disciplined estimation and honest tracking.
ConstructionBids.ai helps you find opportunities that match your capacity and pricing, so you can apply your overhead costs to projects you can execute profitably.
