How to calculate & improve overhead costs in construction

How are you making sure your business stays profitable in an industry where expenses are always changing? Calculating profit margin and overhead cost is crucial to ensuring you do stay profitable and aren’t stuck paying out-of-pocket. Some businesses aren’t calculating them correctly, which can result in exceeding budgeted numbers and little to no business growth.

Don’t let your bank account slip into the red. Learn how to calculate overhead and profit in construction to maintain a stable and thriving company.

What is overhead cost in construction?

Overhead is the ongoing expense from running your business. Construction overhead costs include all direct and indirect expenses.

Direct overhead costs are tied to a specific project. Examples could include equipment rental, project-specific salaries and temporary utilities. Indirect costs aren’t charged to one particular project and are shared across all projects. They can include office expenses, advertising and employee salaries.

General overhead costs in construction amount to a large portion of any project, and failure to account for them can be the difference in a profitable project or a loss for your business.

What are construction overhead costs?

Overhead accounts for many expenses, so what does it actually include? Here are three types of costs you will need to calculate overhead for your construction business.

Operations

Normal business operation expenses. These operation costs can include office rent, employee wages, utilities, building materials, insurance and marketing.

Labor

The cost of employee salaries and benefits. It can be the direct cost of labor for a specific construction project or indirect cost of labor for administrative staff and bookkeepers.

Equipment

The tools and equipment needed for construction projects. This can include anything from cranes to jackhammers.

How to calculate overhead in construction

Step 1: Pinpoint all indirect overhead costs related to your business. Examples of these expenses include office space, administrative costs, insurance, vehicles, advertising and employee salaries.

Step 2: Calculate all direct costs for the specific project. You’ll figure this out by estimating your job, including material and labor costs.

Step 3: Divide your overhead costs by your direct expenses to determine your overhead rate. This percentage will be a general estimate, and it doesn’t take into account that some projects could experience more overhead than others.

Step 4: Use this determined percentage rate to calculate overhead for future projects. Once you figure out your overhead rate, you’ll be able to estimate projects more accurately.

Example of calculating construction overhead costs:

• Your business has $50,000 in administrative expenses every year.
• Your business also has $200,000 in direct project expenses each year, including labor and materials. This brings your total expenses to $250,000.
• $50,000 / $200,000 = 25%. Your overhead rate is 25%.
• Then you’ll use the overhead rate of 25% on future projects. For example, if a project is estimated to cost $20,000, then you could confidently estimate that you’ll have another $5,000 in overhead costs.

Profit margins in the construction industry

A profit margin in construction is the money you have left after all expenses associated with running your business are paid. Profit margin is made up of two main components: overhead and markup. Overhead is the costs endured from running your business, and markup is what you charge on top of your overhead costs. General contractor markups ensure that you consistently have a healthy profit margin.

The average profit margin in construction is typically 6%. However, you should aim for above 10% profit margin to ensure your business stays profitable. By aiming higher for a goal of 15-45% you will allow room for fluctuating expenses as well.

What hurts a business? If you pay more for your services than you sell them for. Managing cash flow, volume and profit is vital to keeping your business successful.

How to calculate construction profit margins

Step 1: Determine the total of the project’s cost estimate

Step 2: Add up overhead costs, material costs and labor costs

Step 3: Divide the total project estimate number by the total project estimate minus the overhead, material and labor costs

Step 4: Multiply the answer by 100 to find the percentage of the profit margin

Example of calculating construction profit margin:

• Formula: Total project estimate / (Total project estimate – Overhead, material, labor costs)
• Total project estimate: $10,000
• Material and labor costs: $8,000
• Overhead: $1,000
• Total Overhead, material and labor costs: $8,000 + $1,000 = $9,000
• $10,000 / ($10,000 – $9,000) = 10% profit margin

Why profit margins are crucial for your construction business

A profit margin is a prime indicator of a construction company’s financial health. The higher your profit margin, the more lucrative your business is. Understanding how to calculate this for your construction business can ensure that you make money after covering all costs of a project.

The average profit margin in construction is 6%. However, you should aim higher, anything above a 10% profit margin will likely keep your business profitable. The ultimate goal is to achieve an average profit margin of 15-45%. Expenses can fluctuate, and you want to allow enough room for these instances. Managing the changes in construction costs and overcoming inflation isn’t a small task, and it’s crucial to be informed about how to combat these struggles in construction.

Controlling profit margins can also help stimulate the growth of your business. Build a construction business plan to calculate healthy margins and avoid paying out-of-pocket expenses. 

How to reduce construction overhead and increase profit margins

The key to a successful and growing business is managing overhead and keeping profit margins high. This takes place from the start of your project during the bidding process all the way through to updating your project budget. Learn how to keep your project management streamlined to increase profit and reduce pesky construction overhead costs.

Improve your bidding process

Developing a good construction bidding process starts with precise estimating. Using construction software can help with these improvements. You can calculate costs in less time and be more exact.

Imagine the time it takes you to complete the bid process on a new project. Now think about the convenience of having data from similar projects to refer to. Construction bidding software, like Buildertrend, holds all data from past jobs to translate to new ones, which saves you time.

The software also allows for easy comparison and documentation of bid requests in one location. Your communication with subcontractors is efficient because you can send updates through email, text or push notifications. When information is sent instantly, you’re more likely to receive quicker responses. Getting these numbers in the software can help you calculate your job costs and plan your project according to your profit margin goals.

Use construction technology to hold financial information

You can easily track and analyze specific job costs throughout the life of project when all your financial data is in one central location. It’s easier to spot something that’s an issue and mitigate overspending when you have data right at your fingertips.

With construction budgeting software like Buildertrend, you’re set with a detailed budget to help ensure current jobs are profitable and allow you to confidently decide if you can take more jobs in the future. Having transparency through a budgeting tool will save you from hidden costs as well.

Simplify business operations

Managing operations is challenging, and controlling profits is arguably the most important part of it. When using construction software, you’re able to track all costs in one platform in real-time. With quicker updates, you’ll have the power to keep projects updated instantly.

You’ll also be able to share this capability with your team, so anyone can update project data. As the project progresses, team members can enter prices for purchased materials, and bookkeepers can adjust budgets to keep everything running smoothly.

Take it from Chris and Amanda, co-owners of Casey Construction Company. They realized that running their small business meant a lot of time spent in the field. They needed a system that could help make their day-to-day processes efficient and organize financial pieces. “The financial aspect of Buildertrend was huge for us, with our consultant helping to streamline and understand the accounting side,” Amanda said.

Increase profits with Buildertrend

Buildertrend offers many financial tools to ensure you increase your construction profit margins and keep them there. The estimating and bidding tools will keep your job costing on point and retrieve quick responses from your subs. You can calculate and compare all numbers on one organized platform.

You’ll also find major benefits in Buildertrend’s budgeting tool, where job costs update in real-time. You never have to wonder how your project is doing financially because you’re set with a detailed budget to keep your jobs profitable.

Lastly, all data is kept in Buildertrend to use on future projects. With this aspect, you’ll spend less time estimating jobs because your numbers are already there. You can also run detailed reports to see where you’re losing money and combat these issues quickly.

Ready to improve your bottom line and grow your business with Buildertrend’s financial tools? Let’s talk!

Construction overhead FAQs

Get answers to the most common overhead questions.