Overhead Recovery & Markup

Your price has to cover three things: direct job cost + a share of overhead + profit. Miss the middle one and you'll "make money on the job, lose money in the business."

Direct cost vs. overhead

• Direct cost — labor, material, equipment, subs for that job.
• Overhead — the cost of running the company: office, insurance, admin, vehicles, your salary.

Recover overhead in your markup

Estimate your annual overhead, then build a recovery rate into every bid (e.g., overhead ÷ expected revenue). Then add profit on top.

Markup vs. margin (again, because it matters)

To hit a target margin, mark up by margin ÷ (1 − margin) — 20% margin needs 25% markup. Add a contingency for risk on tougher jobs.

Going Deeper (Intermediate)

Your price must cover three things: direct cost + overhead + profit. Overhead (G&A: office, insurance, trucks, software, your salary) doesn't belong to one job — you recover it through markup across all jobs. Forget it and your "profit" is fake.

Advanced / Pro-Level

The math that keeps contractors solvent:

• Overhead recovery rate = annual overhead ÷ annual revenue (or ÷ direct cost). If overhead is $300k on $2M revenue, you must recover 15% just to break even — before any profit.
• Markup vs. margin (the perennial trap): to make a 15% margin, divide cost by 0.85 (~17.6% markup), not multiply by 1.15.
• Under-recovery when volume drops: overhead is largely fixed, so if revenue falls your recovery % must rise — contractors who keep the same markup in a downturn quietly lose money.
• Breakeven volume = overhead ÷ gross margin %. Know it. Never "buy work" below cost + overhead just to stay busy.

Practice Challenge

Overhead is 12% of cost and you want 10% profit. What markup on cost do you need? (Answer: you must add 12% for overhead + profit on top — target margin ≈ 22%, so markup = 1 ÷ (1 − 0.22) − 1 ≈ 28% on cost (not a flat 22%); confusing markup with margin is how "profitable" jobs lose money.)

In Practice

A contractor marks up only direct cost plus profit — and pays the office rent out of profit, slowly going broke 'on profitable jobs.' Build overhead recovery into every bid.

Common Mistakes to Avoid

• Leaving overhead out of the markup
• Confusing markup with margin
• No contingency for tough jobs

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

Educational content — not legal, financial, or accounting advice. Run your numbers with your CPA.