CFOS-03OVERHEAD CALCULATION
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THE PROBLEM · FIXED BY STEP 03

Your overhead rate has not been updated in years

The rate in your bid sheet was right once. Revenue doubled, you hired two PMs and a fleet, and the rate never got revisited.

DIRECT ANSWER

Overhead as a percentage of revenue drops as you grow, but only if the revenue catches up to the cost base you built. Add the people first and the ratio goes the wrong way for a year. If the template never moves, you either leave money on the table or you buy work you can't deliver.

WHAT TO DO

Three moves, in order

STEP 01
Recalculate at every revenue band, not every year.
STEP 02
Hold the estimating template and the general ledger to the same definition of indirect cost.
STEP 03
Review it the month after any hire that doesn't touch a job.
THE STEP

Step 03: Overhead calculation

What indirect cost really comes to at your size, and the rate your estimating template should be using.

CFOS-03 · CHAPTER 3
The overhead rate your bid sheet should cover
Read the step that fixes this, what it depends on, and what it changes downstream.
DIAGNOSTIC
Find your numbers
Pick your trade and revenue band. Get your targets, your shortfall, and the step order that closes it.
SYSTEM HUB
All 8 steps in sequence
What each step depends on, what it feeds, and why the order counts for more than the speed.
SAME STEP

Other problems step 03 solves

CFOS-03
You're bidding below your own overhead
If the overhead percentage in your estimating template is lower than what you actually run, every job you win loses money before a single hour is worked.
CFOS-03
Your salary isn't in your overhead
You take draws when cash allows. That means your own pay is invisible in every bid you write.
CFOS-03
You have no idea what good looks like
You know your numbers. You don't know whether they're any good, because you've never seen anybody else's.
ELSEWHERE IN THE SYSTEM

Other things that go wrong

CFOS-07
Profitable on the P&L, out of cash
Your P&L says you made money and your bank account says you didn't. Neither is wrong.
CFOS-07
Pay-when-paid, and how to size what it costs you
You get paid when the GC gets paid, which means the GC's problems are now your problems.
CFOS-07
Your retainage is your whole net profit
Add up your retainage receivable. Compare it to your net profit for the year. They're usually about the same number.
PROOF

Contractors who had this

CIVIL
A maxed $348,000 line of credit, paid off in 60 days
A civil contractor had a maxed line of credit and 30% overhead, and couldn't point at where either came from.
TENANT IMPROVEMENT GENERAL CONTRACTOR
6.7% to 11.2% net profit in 120 days
A tenant improvement GC was using each new job to finish the last one, and could see two weeks ahead at best.
CIVIL
Four merchant cash advances gone, gross profit 5% to 33%
A civil subcontractor did everything right to grow and nearly finished the business doing it.
CONCRETE
$1.3M less revenue, and more profit than the year before
A concrete subcontractor had overhead on the books at 5% when the real number was closer to 12%, so every bid was wrong by the difference.
ELECTRICAL · IN PROGRESS
33 points of overhead found in the first 30 days
An electrical service contractor had been running on fear since a partner situation pulled six figures out of the company.
LANDSCAPING
Breakeven to $12,000 a month in cash, in 75 days
A father and son operation was losing its entire margin to a dozen small leaks, none of which looked big enough to chase.
QUESTIONS

What owners ask

When to update construction overhead rate?

The rate in your bid sheet was right once. Revenue doubled, you hired two PMs and a fleet, and the rate never got revisited. Overhead as a percentage of revenue drops as you grow, but only if the revenue catches up to the cost base you built. Add the people first and the ratio goes the wrong way for a year. If the template never moves, you either leave money on the table or you buy work you can't deliver.

Which part of the system fixes this?

The step is number 03, overhead calculation. What indirect cost really comes to at your size, and the rate your estimating template should be using. It's drawn from chapter 3 of CONTROL: The Construction Financial Operating System.

Is this normal for my trade?

Across the 48 trades that publish a figure, net profit at $1M–$5M averages 7% before taxes. If you're well under that and this page describes your month, the two are usually the same story. The published average tells you where the pack is, and your own job costing tells you where you are, which is the number that pays payroll.

Where do I start?

Recalculate at every revenue band, not every year.

Can I fix this without touching anything else?

You can try, and it doesn't hold. Step 03 depends on step 01, job cost structure and step 02, equipment cost basis. Install it ahead of those and it produces numbers the field won't trust, which is worse than the problem you started with.

AUTHOR
Josh Luebker
JOSH LUEBKER
MASTER ELECTRICIAN · 150+ PROJECTS · $2.1B+ MANAGED

Wrote CONTROL, the 8 step system behind these figures. More about the author.

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