Direct cost versus overhead
A direct cost can be traced to one job: the material delivered to that address, the subcontractor invoice for that scope, the dumpster rented for that week. Overhead is everything required to run the business whether or not a particular job happens: rent, insurance, vehicles, phone, software, accounting, marketing, office supplies, shop utilities, licensing and administrative time.
The distinction matters because direct costs rise and fall with the work, while overhead tends to stay. A busy month can absorb more overhead; a slow month cannot. Pricing every job with an overhead allowance is how the business covers the slow months and the fixed bills.
The overhead recovery formula
Annual billable hours are the hours you can realistically sell, not the hours you pay for. Start with each worker's productive hours after paid time off, holidays, training and administration. Then apply a utilization rate for the share of those hours that actually gets billed. A two-person crew with 1,560 productive hours each at 80% utilization provides 2,496 billable hours.
If you enter overhead per hour in the job-cost calculator, that rate is applied to every crew hour on the job. Jobs that consume more supervision, travel or office support than average may need a higher allocation or a separate charge.
overhead per billable hour = annual overhead ÷ annual billable hoursOverhead recovery rate and utilization
The result is an overhead recovery rate: the amount each billable hour must contribute toward indirect business costs. It is not a markup, a profit rate or a charge that belongs in the direct-cost column. Changing the utilization assumption changes the rate without changing annual overhead, which is why the denominator deserves as much attention as the expense list.
The table below shows how the same $96,000 of overhead spreads across different utilization levels. The overhead calculator computes this sensitivity from the overhead, headcount and productive hours you enter, so the comparison uses your business rather than a generic example. If the recovery rate rises sharply when utilization falls, the business needs enough margin or volume to absorb the slower periods.
| Utilization | Annual billable hours | Overhead per billable hour |
|---|---|---|
| 60% | 1,872 | $51.28 |
| 70% | 2,184 | $43.96 |
| 80% | 2,496 | $38.46 |
| 90% | 2,808 | $34.19 |
Worked example
The overhead amount, hours and utilization rate are illustrative. Use your profit-and-loss statement for overhead and your time records for hours.
Illustrative example: a two-technician business
- Annual overhead: $96,000, covering rent, insurance, vehicles, software, accounting, marketing and administrative wages.
- Each technician provides 1,560 productive hours after paid time off, holidays, training and administration.
- 2 technicians × 1,560 productive hours × 80% utilization = 2,496 billable hours.
- Overhead per billable hour: $96,000 ÷ 2,496 = $38.46.
- A 48-hour job therefore carries 48 × $38.46 = $1,846.08 of overhead.
Overhead recovery: $38.46 per billable hour.
What belongs in overhead
Owner pay and profit are not overhead. Owner pay is compensation for work or investment; profit is the return that remains after all costs. Income taxes are not overhead either. Mixing those into overhead inflates the hourly rate and hides the return the business is actually earning.
- Facilities: rent or mortgage interest, utilities, property insurance, maintenance and security.
- Vehicles: insurance, registration, depreciation or lease cost, maintenance and the non-job share of fuel.
- People and administration: office wages, owner time spent running the business rather than producing billable work, payroll services and recruiting.
- Business systems: software, phones, internet, banking fees, accounting and legal fees, licenses and permits that cover the business rather than a single job.
- Marketing: website, advertising, signage, vehicle wraps and customer acquisition costs.
- Financing and bad debt: interest on business borrowing and a realistic allowance for uncollected invoices.
Avoiding double counting
The most common overhead error is charging the same cost twice. If vehicle insurance is in overhead and the job-cost estimate also adds a vehicle charge, the customer pays for it twice. Choose one home for each cost and apply it consistently.
The second error is charging overhead to a job at all in the direct-cost section. That makes the job look expensive for the wrong reason and makes it harder to compare suppliers or crews.
Overhead recovery is an average, not a rule
A single rate spreads fixed costs evenly across hours. Real jobs differ: a distant job consumes more travel, a complex job consumes more supervision, a small job may consume a disproportionate share of scheduling and administration. The average rate is a practical starting point, not a precise allocation.
Review the rate at least annually, and whenever rent, insurance, staffing or utilization changes materially. A rate built on last year's overhead applied to this year's costs leaves a gap that margin has to absorb.
Sources and scope
QuoteFormula records
- QuoteFormula calculation methodology and formula version 2026.10.1
- Figures recorded by the contractor in this browser
- Illustrative worked examples written for this guide
Primary sources
These guides explain QuoteFormula's arithmetic and common contractor business concepts. They do not provide tax, legal, payroll, insurance or accounting advice. Every example is illustrative, not a benchmark, market rate or promise of profit.
Editorial details
Found an error? Compare the arithmetic with the published methodology, the data sources page and the editorial policy.