How to Calculate Overhead and Profit in Construction Bids

Understanding how to properly calculate and apply overhead and profit is fundamental to construction business success. Too low, and you'll win projects that drain your company. Too high, and you'll lose bids to competitors. This guide explains how to find the right balance.

Understanding the Components

What is Overhead?

Overhead refers to the costs of running your business that aren't directly tied to a specific project. There are two types:

General (Company) Overhead

Expenses that keep your business operating:

• Office rent and utilities
• Administrative staff salaries
• Insurance (general liability, umbrella)
• Professional fees (accounting, legal)
• Marketing and business development
• Vehicle and equipment costs
• Software and technology
• Licenses and permits
• Training and education

Job Overhead (General Conditions)

Project-specific costs not tied to individual work items:

• Project management and supervision
• Job site office and facilities
• Temporary utilities
• Site security
• Safety equipment and signage
• As-built documentation
• Project-specific insurance
• Small tools and consumables

What is Profit?

Profit is your return on the work performed—the compensation for:

• Business risk assumed
• Capital invested
• Owner/shareholder return
• Future growth investment
• Reserve building

Calculating Your Company Overhead Rate

Step 1: Determine Total Annual Overhead

Add up all your non-project-specific costs:

| Category | Annual Cost | |----------|-------------| | Office rent | $36,000 | | Utilities | $6,000 | | Admin salaries | $120,000 | | Insurance | $45,000 | | Professional fees | $15,000 | | Marketing | $24,000 | | Vehicles | $30,000 | | Software | $12,000 | | Miscellaneous | $12,000 | | Total Overhead | $300,000 |

Step 2: Determine Your Volume Base

Your overhead rate is typically calculated against:

• Total direct costs (labor + material + equipment + subs)
• Direct labor costs only
• Total revenue

Example using total direct costs:

If your annual direct costs are $2,400,000:

Overhead Rate = $300,000 ÷ $2,400,000 = 12.5%

Step 3: Verify Rate Reasonably

Compare your calculated rate to industry benchmarks:

| Company Type | Typical Overhead Rate | |--------------|----------------------| | Small contractor (<$2M revenue) | 10-18% | | Medium contractor ($2M-$10M) | 8-15% | | Large contractor (>$10M) | 5-12% | | Specialty contractor | 12-20% |

If your rate varies significantly, analyze why and whether adjustments are needed.

Setting Your Profit Margin

Factors Influencing Profit Percentage

Market Conditions

• Competitive intensity
• Supply and demand balance
• Economic environment
• Client negotiating power

Project Characteristics

• Complexity and risk level
• Contract type (lump sum vs. cost-plus)
• Payment terms
• Client relationship
• Project size and duration

Company Factors

• Capacity utilization
• Strategic importance
• Cash flow needs
• Risk tolerance

Typical Profit Ranges

| Project Type | Typical Profit Range | |--------------|---------------------| | Low risk, repeat client | 3-5% | | Standard commercial | 5-8% | | Complex/specialized | 8-12% | | High risk projects | 10-15%+ | | Design-build | 8-15% | | Negotiated work | 5-10% |

Applying Markup to Bids

Combined Markup Method

Many contractors combine overhead and profit into a single markup:

Example:

• Overhead rate: 12%
• Target profit: 8%
• Combined markup: 20%

Apply to direct costs:

| Cost Type | Amount | |-----------|--------| | Direct labor | $150,000 | | Materials | $200,000 | | Equipment | $25,000 | | Subcontractors | $300,000 | | Total Direct Costs | $675,000 | | Markup (20%) | $135,000 | | Total Bid | $810,000 |

Differentiated Markup Method

More sophisticated approach applies different markups to different cost types:

| Cost Type | Amount | Markup | Markup $ | |-----------|--------|--------|----------| | Direct labor | $150,000 | 45% | $67,500 | | Materials | $200,000 | 15% | $30,000 | | Equipment | $25,000 | 20% | $5,000 | | Subcontractors | $300,000 | 10% | $30,000 | | Total | $675,000 | | $132,500 | | Total Bid | | | $807,500 |

This method recognizes that different cost categories carry different risk and overhead burdens.

Markup on Subcontractors

The markup on subcontractor work is often debated:

Arguments for Full Markup:

• You manage and coordinate subs
• You carry bonding and insurance
• You bear risk of sub default
• You provide contract administration

Arguments for Reduced Markup:

• Lower overhead burden on sub work
• Competitive pressure
• Sub already includes their profit

Common Practice: 5-15% on subcontractor costs

Job Overhead (General Conditions) Calculation

Identify Required Items

Review project requirements for:

• Supervision staffing
• Temporary facilities
• Safety requirements
• Documentation needs
• Schedule duration

Calculate Costs

Supervision Example (12-month project):

| Position | Monthly Cost | Months | Total | |----------|--------------|--------|-------| | Project Manager (50%) | $6,000 | 12 | $72,000 | | Superintendent | $10,000 | 12 | $120,000 | | Project Engineer | $7,000 | 10 | $70,000 | | Total Supervision | | | $262,000 |

Facilities Example:

| Item | Monthly Cost | Months | Total | |------|--------------|--------|-------| | Job trailer | $800 | 12 | $9,600 | | Temporary power | $400 | 12 | $4,800 | | Portable toilets | $300 | 12 | $3,600 | | Dumpsters | $600 | 12 | $7,200 | | Total Facilities | | | $25,200 |

Present General Conditions

General conditions can be:

• Included in your overhead markup (hidden)
• Shown as separate line item (transparent)
• Listed as detailed schedule of values

Many public projects require detailed general conditions breakdown.

Strategies for Competitive Pricing

Know Your Break-Even Point

Calculate the minimum markup you need to cover overhead:

Break-Even Markup = Annual Overhead ÷ Expected Direct Costs

Below this point, you're losing money on overhead recovery—even if you make "profit" on paper.

Adjust for Project Specifics

Consider adjusting markup for:

Lower markup when:

• Repeat client with smooth processes
• High-volume, low-complexity work
• Need to fill schedule capacity
• Strategic relationship building

Higher markup when:

• Complex or risky scope
• Difficult site conditions
• Aggressive schedule
• Unknown client
• Specialized expertise required

Volume Considerations

Your overhead rate assumes a certain volume:

• If volume drops, overhead rate per project increases
• If volume rises, rate per project may decrease
• Consider capacity when pricing

Common Mistakes to Avoid

1. Not Knowing Your True Overhead

Many contractors guess at overhead rather than calculating:

• Track all expenses accurately
• Review annually (or more often)
• Categorize costs properly
• Include owner compensation

2. Applying Flat Markup to Everything

Different work types have different profiles:

• Self-performed work carries more overhead
• Subcontracted work carries less
• Material-intensive work differs from labor-intensive

3. Ignoring Job Overhead

Failing to price general conditions properly:

• Underpriced supervision dooms projects
• Missing temporary facilities costs
• Inadequate safety budgets

4. Racing to the Bottom

Cutting markup too aggressively:

• Wins unprofitable work
• Creates cash flow problems
• Damages company long-term

5. Not Adjusting for Market

Using the same markup regardless of conditions:

• Hot markets support higher margins
• Slow markets require adjustment
• Project specifics matter

Monitoring and Adjustment

Track Actual vs. Estimated

On completed projects, compare:

• Actual overhead costs to estimates
• Actual profit to projected
• Where variances occurred

Adjust Your Rates

Based on tracking:

• Update overhead calculations annually
• Refine markup by project type
• Build historical database

Win Rate Analysis

Consider your bid success rate:

• Winning less than 10%? May be priced high
• Winning more than 30%? May be leaving money on table
• Target 15-25% win rate typically

Conclusion

Properly calculating overhead and profit requires understanding your actual costs, market conditions, and project-specific factors. Don't guess—calculate based on real data and adjust continuously based on results.

Remember: the goal isn't to win every project. It's to win profitable projects that your company can execute successfully. Price your work to cover all costs, provide appropriate profit, and build a sustainable business.

Start by calculating your true overhead rate if you haven't already. Then develop a systematic approach to markup that considers project risk, client relationships, and market conditions. Your bottom line will reflect the effort you invest in getting this right.