What is overhead and profit for a contractor?

Overhead is every business cost not tied to a single job — vehicle, insurance, phone, software, advertising, and the unpaid hours spent running the business. Profit is what remains after both direct job costs and overhead are covered. They are separate: money that only covers overhead is not profit, even if it looks like it on a single job.

What is the 10 and 10 rule in construction?

The "10 and 10" adds 10% for overhead and 10% for profit on top of a job's direct costs — a common industry rule of thumb. It is a useful starting point, but many small trade businesses find their actual overhead is higher than 10% once they total it honestly, so it is worth calculating your real overhead rate.

How do I calculate my overhead rate?

Add up your total annual overhead — vehicle, insurance, software, advertising, licensing, and unpaid admin time — then divide by the number of hours you actually bill in a year. The result is the overhead you must add to each billable hour on top of direct costs, before adding your profit margin.

Overhead and Profit for Contractors

What counts as overhead

Overhead is everything you pay for to be in business that you cannot pin to a single job. It runs whether you work one job this month or thirty.

Vehicle — payment, fuel, maintenance, insurance.
Business insurance and licensing.
Phone, software, and bank or processing fees.
Advertising and the website.
Tools and equipment not charged to a specific job.
The unpaid hours you spend quoting, invoicing, chasing payment, and driving between jobs.
Slow weeks — the winter lull, the rained-out days.

That last category is the one most contractors forget. The hours you spend running the business instead of swinging a wrench are real costs. If you do not price for them, you are paying for them out of what you think is your profit.

Why overhead and profit are two different things

Here is the trap. A contractor prices a job at direct cost plus a 30% markup, the job comes in fine, and he counts that 30% as profit. But the truck, the insurance, and the ten hours he spent that week quoting and invoicing all have to come out of that same 30% first. What is actually left over — the true profit — might be close to zero.

Profit is only the money remaining after both the direct job costs and your share of overhead are paid. A job can have a healthy gross margin and still contribute nothing to profit once overhead is properly allocated. This is why a contractor can be busy, see decent margins on paper, and still wonder where the money went — the overhead was never charged for. It is the same mechanism behind cash-flow trouble in otherwise profitable businesses.

How to build overhead and profit into your prices

The cleanest method is to know your annual overhead, then recover it across your billable hours. Add up everything in the overhead list for a year, divide by the number of hours you actually bill (not the hours you work — the ones you can charge for), and that is the overhead you must add to every billable hour on top of direct cost. Then add your profit margin on top of that.

If you want a fast rule of thumb, the construction-standard "10 and 10" adds 10% for overhead and 10% for profit on top of direct costs — though many small trade businesses need more than 10% overhead recovery once they measure it honestly. Get the underlying labour number right first with How to Calculate Your Labor Rate.

The only way to know whether you are actually charging enough is to compare quoted margin to real margin across many jobs. Fieldpaid shows that comparison automatically on every paid invoice, so you can see whether your prices are clearing overhead and leaving real profit — or just feeling profitable.

Overhead and Profit Explained: The Number Most Contractors Forget to Charge