Overhead Recovery & Markup

Welcome

Hello, and welcome. This is Super Structures General Contractors — a national general contractor headquartered in Powhatan, Virginia — here to help you and your clients build something that lasts. We're glad you're with us, and we look forward to connecting with you.

Alright, Overhead Recovery & Markup. Don't let the plain title fool you. Here's the part that actually matters on the job: If your markup doesn't include overhead, you're paying for the office out of profit. Learn it well and you will stop "making money on every job" while the company quietly loses it, which is the most common way a busy contractor goes broke.

Your price has to cover three things: direct job cost, a share of company overhead, and profit. Miss the middle one and the jobs look profitable on paper while the business bleeds. This lesson walks through the math with real numbers so you can set your markup on purpose instead of by habit.

Three layers of cost in every price

• Direct cost — labor, material, equipment, and subcontractors for that job. If the job disappeared, so would these costs.
• Job overhead (general conditions) — the superintendent, the trailer, temporary utilities, toilets, dumpsters, and project insurance. These also belong to the job, and they go in the estimate as their own line items, not in the markup.
• Company overhead (G&A) — the cost of running the business: office rent, office staff, estimating, accounting, software, vehicles not charged to a job, liability insurance, marketing, and the owner's salary. No single job causes these, so every job must carry a share.

Profit sits on top of all three. It is the reward for risk and the money that funds growth, equipment, and a bad year.

Calculating your overhead recovery rate

Start with last year's income statement and this year's budget. Add up everything that was not a direct job cost. Say it comes to $300,000.

Now pick a base:

• As a percentage of revenue: $300,000 ÷ $2,000,000 of expected revenue = 15 percent. Every dollar you bill must carry 15 cents of overhead just to break even.
• As a percentage of direct cost: if that $2,000,000 of revenue has $1,600,000 of direct cost, then $300,000 ÷ $1,600,000 = 18.75 percent of cost.

Both are correct; they are just different bases. The mistake is mixing them — applying a percentage-of-revenue rate to cost, or the reverse. Pick one, write it down, and use it consistently.

Markup versus margin, with numbers

Markup is added to cost. Margin is measured against price. The same dollars give two different percentages, and confusing them costs real money.

To hit a target margin, mark up by margin ÷ (1 − margin):

• 10 percent margin needs 11.1 percent markup
• 15 percent margin needs 17.6 percent markup
• 20 percent margin needs 25 percent markup
• 25 percent margin needs 33.3 percent markup
• 30 percent margin needs 42.9 percent markup

The shortcut: price = cost ÷ (1 − target margin). To make 15 percent margin on $100,000 of cost, divide by 0.85 to get $117,647. Multiplying by 1.15 gets you $115,000 and a 13 percent margin — close enough to fool you and far enough to hurt.

Building the full price

Put it together. Direct cost on a job is $100,000. You need 15 percent of revenue for overhead and want 10 percent of revenue as profit, a combined 25 percent margin.

• Price = $100,000 ÷ (1 − 0.25) = $133,333
• Overhead recovered: 15 percent × $133,333 = $20,000
• Profit: 10 percent × $133,333 = $13,333
• Check: $100,000 + $20,000 + $13,333 = $133,333

That is a 33.3 percent markup on cost. A contractor who "always marks up 20 percent" prices this job at $120,000, recovers $18,000 of overhead at best, and keeps about $2,000 of profit on $100,000 of work and all of its risk.

Going Deeper (Intermediate)

Overhead is mostly fixed, and that is the trap when volume drops. If revenue falls from $2,000,000 to $1,500,000 and overhead stays at $300,000, your recovery rate has to rise from 15 percent to 20 percent or the shortfall comes straight out of profit. Contractors who keep the same markup in a slow year because "that's what we've always charged" lose money without a single bad job.

Know your breakeven volume: overhead ÷ gross margin percentage. With $300,000 of overhead and a 25 percent gross margin, you need $1,200,000 of revenue before the first dollar of profit. Below that, every additional job helps only if it carries its share of overhead. "Buying work" below cost plus overhead to stay busy is a decision to lose money slowly.

Add a contingency on tougher jobs — vague scope, new client, tight schedule — as a separate line, not buried in markup, so you know what you are charging for and why.

Advanced / Pro-Level

A single flat percentage treats every job the same, and jobs are not the same. A $2,000,000 project that is 90 percent subcontracted uses far less of your office, estimating, and supervision than a $2,000,000 project your own crews build. Pros use a dual-rate approach: a higher overhead rate on self-performed labor (often expressed per labor hour) and a lower rate on subcontract and material dollars. The total recovered across the year still has to equal the overhead budget.

Track actual overhead monthly against the budget you built the rate from, and compare overhead recovered on billed work to overhead spent. If you are under-recovering by mid-year, adjust the markup for the second half rather than discovering the gap at year-end. On cost-plus and fee-based contracts, make sure the fee covers both overhead and profit, or negotiate overhead as an explicit reimbursable line; a "10 percent fee" that is really your whole margin, against 15 percent overhead, is a loss dressed up as a win.

Practice Challenge

Direct cost on a job is $250,000. Your overhead recovery rate is 15 percent of revenue and you want an 8 percent profit on revenue. What price do you quote, what markup on cost is that, and what happens if you simply multiply cost by 1.23? (Answer: combined margin is 23 percent, so price = $250,000 ÷ 0.77 = $324,675, a markup of about 29.9 percent on cost. Multiplying by 1.23 gives $307,500; the $57,500 above cost is only 18.7 percent of that price, so you are roughly $17,000 short of the overhead and profit you meant to charge — confusing markup with margin is how "profitable" jobs lose money.)

In Practice

A contractor who knows her overhead number, recomputes the recovery rate every year, and prices with cost divided by one minus margin ends the year with the profit she planned. A contractor who marks up direct cost plus a profit number he likes pays the office rent out of that profit and goes broke slowly on jobs that all looked good.

Common Mistakes to Avoid

• Leaving company overhead out of the markup entirely
• Confusing markup with margin, or mixing a revenue-based rate with a cost base
• Keeping the same markup when volume drops
• Putting job overhead and contingency inside the markup where nobody can see them
• Never comparing overhead recovered to overhead actually spent

Takeaway: If your markup doesn't include overhead, you're paying for the office out of profit.

Educational content — not legal, accounting, or contractual advice. Estimating methods, overhead rates, and cost data vary by market, project, and firm; build and verify with your own historical data and run your numbers with your CPA.