When I first began my hardscaping business, I did not know anything about overhead expenses. Whenever I was pricing out a project, I added up my material cost and closed my eyes trying to picture how long each phase of the project would take. I then took that number and thought to myself how much money I would like to earn on that work. This is the number that I sent off to my customers.
There was no method to this madness, and I was lucky I stayed in business without calculating my construction overhead and profit. Somehow it worked, but I did not know if I was covering my business expenses or even bringing in enough money to keep growing my business. The truth is that being a business owner is not just about being the best at your craft, it is also about knowing your numbers.
With any business, there is a cost to keep it running. You are paying for equipment, tools, insurance, and the basic necessities of your business. These costs should not be eaten by you. These should be averaged out throughout your working year and added into the estimate of each project.
In this article, we are going to run through what your overhead expenses are, how to include them in each estimate, and how you should be recouping those costs.
What is Overhead and Profit in Construction
If you follow us, you know that we are dedicated to creating content that relates to the field of landscape construction or hardscaping. However, the idea of overhead and profit as we will be talking in this post relates to any project specific estimating business out there, especially in the field of construction.
Estimating a project involves more than just looking at the cost of materials that you will be installing and multiplying it by four to bill out to your customer. This is guess work and as your business grows, you will never know that you are covering your expenses until year end comes around and you are short on money. It is also more than just adding the cost of materials and labor costs, while thinking about how much you as the owner want to take home.
There are two really important things to think about in addition to what we have discussed. When bidding any project you need to consider your overhead and profit. So, what is overhead cost in construction?
Construction Overhead Expenses
Overhead expenses are those costs that are incurred by any business that are not specific to any project. These costs are paid out by the business regardless of if they are out there working. Even if there is a day off, the business is still paying for these expenses. Sometimes they are quite obvious and other times they are a little more hidden and you need to really think about where your businesses money is going. These expenses should be budgeted for at the beginning of the year and billed out in every estimate based on the amount of hours spent on that project. We will get into more of that later.
Examples of Overhead Cost in Construction
Pretty much anything that costs your business money outside of cost of materials and labor can be categorized as an overhead expense. Overhead charges in construction can include a wide variety of things including:
- Accountant Fees
- Lawyer Fees
- Cell Phone Fees
- Online and Offline Marketing
- Insurance – Workplace and Business
- Office Supplies
- Banking Fees
- Travel and Entertainment
- Bad Debts
- Anything that costs your business money outside of materials and labor./li>
There are other expenses that can be treated as Overhead Expenses when incorporating their costs into projects. This includes things like vehicle expenses, equipment expenses, and salaries. All of these expenses you know or can budget for what they are going to cost you throughout the year which will allow you to build their costs into every project based on the amount of time that you will spend on that job. More on calculating this later.
Profit in Construction
Profit is quite simply the money that a business earns from any given project. You can forecast a profit amount and include it in your estimate. You will not truly know the profit that you earn on a project until after that project is completed. For example, maybe you added 10% profit into your estimate but your crew took longer than expected or you fell short on product and needed to order more. That lost amount will negatively affect your profit. Alternatively, maybe your crew finished ahead of schedule. This will positively affect your profit for that project.
When we are calculating how much profit we want to make on a job, we are talking Net Profit. This is the profit that the business earns after all cost of goods, expenses, labor, and taxes are paid for. This number is not to be confused with what the business owner earns. If the business owner takes home all of the profits that the business makes, then that is their salary and the profit is zero. The business owner’s salary is deducted from the revenue of each project much like any salaried employee would be.
How to Calculate Overhead and Profit in Construction
Your overhead expenses and profit should be included in every single project that you estimate. If they are not accounted for, then these expenses are coming out of your pocket and you are not making the profit that you want. This is why it is so crucial to know your numbers when you are in business and to ensure that you are making back those numbers with every project that you complete.
Following the different examples of overhead expenses that are listed above, you should add up all of their yearly costs to provide you with your total overhead expenses for the year. Once you have that, you need to calculate how many working hours you have available during your working season. To calculate this, you should determine:
- Number of weeks in your working season.
- Number of days per week your crew works.
- Number of hours per day your crew works.
Multiplying these three numbers together will provide you with the number of working hours available to your business per man. It is important to not over-budget this number. For example, if you believe that you can work 7 days a week and put in 12 hours, but in reality you only get 6 days of work in and work 10 hours per day, then you will be out money at the end of your working season because of these lost hours. Budget the time correctly based on last years numbers or based on a normal working week.
Total Number Hours Budgeted = Working Weeks in Season x Working Days per Week x Working Hours per Day
Side Note: You should know that you will need to budget in the overtime pay for your workers and this will be budgeted based on these numbers. This is calculated by taking the number hours per season that are available per person and subtracting it by the number of hours workers can work in that season before overtime is paid. Calculate that number by multiplying the number of weeks in your working season, number of days per week your crew works, and the number of hours per day that your crew can work before overtime is paid. You can then take the total after the subtraction and multiply them by the overtime multiplier that you pay minus 1. For example, an overtime multiplier of 1.5x would be 0.5x that number. This would need to be completed for each employee that is paid overtime. However, this will be covered in our article on calculating labor costs.
With the total number of hours that you have budgeted per season, you now can divide the total cost of your yearly expenses by the total number of hours to provide you with an hourly cost for your overhead expenses that should be billed in to every project based on the amount of hours that you will have dedicated to that project. This is how to calculate overhead rate in construction.
Overhead Expenses per Hour = Yearly Overhead Cost / Yearly Budgeted Hours
What is a good construction overhead percentage per job? This is specific to every business. Those with smaller operating costs and not a lot of equipment will have lower overhead expenses per year and will take up a smaller percentage of your total project cost. However, these businesses will likely be taking on smaller projects. Alternatively, businesses with larger overhead expenses per year will take up more of the percentage of the total project cost, but they will be taking on larger projects. In each of these scenarios, the overhead expenses may take up 25% to 33% or a quarter to a third of the total project cost.
Profit is calculated as a percentage amount on top of your total for the project or based on each of the services that your business offers. Your profit can be calculated as a percentage of your total estimate or added in to various services that you offer. For example, in our hardscaping business we offer many different services. We do hardscaping, softscaping, landscape lighting, and installation of features like fire and outdoor kitchens. Each of these come with a different percentage of profit. Landscape lighting brings with it the highest percentage of profit for our business and is also why we promote this to others to improve the profit in their business. It is an easy skill to learn, has a high profit percentage, and looks incredible.
If you are looking for a construction overhead and profit calculator and learning more about overhead expenses, profit, and how to calculate these two into every project that you estimate, you can click here to view our Budget and Estimate Spreadsheet.
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