How to Calculate Overhead for a Trades Business (With Examples)

Do you know what it costs to keep your doors open for one hour?

Most trades owners don't. They know what a job costs in parts and labor. But the shop, the trucks, the phones, and the office manager get paid whether anyone is working a job or not.

That's overhead. And if your prices don't cover it, every job loses a little money, even the ones that look profitable.

Here's how to calculate it, step by step, with a real-world example.

What Counts as Overhead?

Every dollar your business spends lands in one of two buckets.

The Job Bucket. These are costs tied to a specific job. If the job didn't happen, you wouldn't spend the money. Accountants call these direct costs.

• Parts and materials for the job

• Your techs' pay for the hours they spend on the job

• Subcontractors you hire for the job

• Permits and equipment rentals for the job

The Keep-the-Lights-On Bucket. This is overhead. These are costs you pay no matter how many jobs you run this month.

• Shop or office rent, and utilities

• Office staff, like a dispatcher or office manager

• Business insurance

• Truck payments and truck insurance

• Field software, like Jobber, Housecall Pro, or ServiceTitan

• Phones, internet, and your website

• Marketing

• Bookkeeping and tax prep

A simple test: if you took every truck off the road for a month, would you still owe it? If yes, it's overhead.

The Gray Areas

A few costs can land in either bucket. Pick one rule and stick with it.

• Your own pay. If you're on the tools most days, the hours you work on jobs are job costs. If you run the office, your pay is overhead.

• Fuel. Most small shops treat fuel as overhead, because it's hard to split by job. That's fine, as long as you do it the same way every month.

• Tools. A part that goes into a customer's system is a job cost. A tool you'll use on a hundred jobs is overhead.

How to Calculate Overhead, Step by Step

Step 1: Add Up Your Overhead Costs

Pull a full year of expenses, or the last 12 months. Use a year, not a single month. Insurance, software renewals, and slow seasons all even out over a year.

Add up everything in the Keep-the-Lights-On Bucket.

Here's an example. Say you run a two-tech HVAC company. These numbers are made up, but they're the kind of costs a shop like this carries.

That's about $10,750 a month before a single job gets done.

Step 2: Calculate Your Overhead Percentage

This tells you how much of every sales dollar goes to overhead.

Overhead percentage = total overhead ÷ total sales × 100

Say the company did $600,000 in sales last year.

$129,000 ÷ $600,000 × 100 = 21.5%

So about 21 cents of every dollar you bring in pays for overhead.

Step 3: Calculate Your Overhead Rate per Billable Hour

This is the number that matters most for pricing. It tells you how much overhead each hour of work has to carry.

Overhead rate = total overhead ÷ total billable hours

A billable hour is an hour a tech spends on a job you can charge for. Driving between jobs, picking up parts, and callbacks don't count.

Say each of your two techs bills about 1,400 hours a year. That's 2,800 billable hours.

$129,000 ÷ 2,800 = about $46 per billable hour

That means every hour your techs bill has to bring in $46 just to cover overhead. That's before you pay the tech, buy the parts, or make a profit.

Another Way: Overhead as a Percentage of Labor

Some owners compare overhead to what they pay their field techs.

Overhead rate = total overhead ÷ total tech wages × 100

If your two techs earned $130,000 together:

$129,000 ÷ $130,000 × 100 = 99%

In plain words, for every dollar you pay a tech, you spend about another dollar on overhead. Use whichever version is easier for you to track. The per-hour rate is the most useful for setting prices.

What Your Overhead Rate Means for Your Prices

Here's where the math pays off. Your hourly rate has to cover three things.

1. What the tech costs you. $130,000 in wages ÷ 2,800 billable hours = about $46 per hour.

2. Overhead. About $46 per hour, from Step 3.

3. Profit. Whatever you want to keep.

So in this example, each billable hour costs about $92 before parts and before profit. If you charge $95 an hour, you're making about $3. If you charge $85, every hour loses money.

One caution. The tech cost above is wages only. Payroll taxes, workers' comp, and benefits add more on top. That extra cost is called labor burden, and it raises your true cost per hour even further. Here's how to calculate your labor burden.

Your Break-Even Point

Overhead also tells you how much you need to sell just to break even. Break-even means you cover every cost and make zero profit.

To find it, you need your gross margin. Gross margin is the share of each sales dollar left after job costs. If a $1,000 job costs you $550 in parts and tech labor, your gross margin is 45%.

Break-even sales = total overhead ÷ gross margin

$129,000 ÷ 0.45 = $286,667 a year

Below that, you're losing money. Above it, every dollar of gross profit is yours to keep.

What's a Normal Overhead Percentage?

You'll find plenty of rule-of-thumb numbers online. We don't trust most of them. They mix very different businesses, and they rarely say where the number came from.

Your own trend matters more. Track your overhead percentage every month. If it creeps up while sales stay flat, something got more expensive. If sales grow and overhead stays put, your percentage drops and your profit grows. Why? Because overhead doesn't rise with every new job.

Why Most Owners Can't Calculate This

The math is simple. The hard part is the books.

To calculate overhead, every expense has to be in the right bucket. In a lot of trades businesses, it isn't. Parts, fuel, rent, and the owner's lunch all land in one big "expenses" pile. Or the job costs are lumped together, so there's no way to tell what a job really cost.

When your books are set up right, the two buckets are already separate. Your Profit and Loss report shows job costs at the top and overhead below them. Your overhead total is one number you can read off the report every month.

That's how we set up books for trades businesses. If you're setting up QuickBooks yourself, see QuickBooks Online for Contractors for how to split job costs from overhead.

Key Takeaway: Overhead is everything you pay to stay open, whether or not a job gets done. Add up a year of it, divide by your billable hours, and you have the overhead each hour has to carry. If your hourly rate doesn't cover your tech cost plus that number, you're losing money on every hour, no matter how busy you are.

At Civita Tax Solutions, we help home service business owners save money on taxes with all-in-one accounting. We handle your bookkeeping, advisory, and tax filing. You focus on the business. We handle the finances.

Want your overhead on one line of your monthly report? See our bookkeeping plans for contractors. Wondering what that costs? Read How Much Does an Accountant Cost for a Small Business?

Work in a specific trade? See how we handle bookkeeping and taxes for plumbers, HVAC contractors, electricians, landscapers, and painters.

www.civitataxsolutions.com