How do you calculate and reduce overhead costs in construction?
Construction overhead costs can have a major impact on profitability. If overhead expenses aren’t tracked and included in estimates, projects can quickly exceed budget and reduce margins. Understanding how to calculate overhead costs and profit margins helps contractors price jobs accurately, protect cash flow and build a more profitable business.
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 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's overhead cost in construction?
- What expenses are included in construction overhead costs?
- How do you calculate overhead costs in construction?
- What's a healthy profit margin in construction?
- How do you calculate profit margins on construction projects?
- Why are profit margins important for construction businesses?
- How can contractors reduce overhead costs and improve profit margins?
- How can Buildertrend help improve construction profitability?
What’s overhead cost in construction?
Construction overhead costs are the ongoing expenses required to operate a construction business. These costs aren’t always tied directly to labor or materials on a specific project, but they still must be covered through project revenue to maintain profitability.
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 between a profitable project and a loss for your business.
What expenses are included in construction overhead costs?
Construction overhead costs typically include operational expenses, labor-related expenses and equipment costs. Some costs can be assigned directly to projects, while others support the business as a whole and must be spread across multiple jobs.
Operations
Normal business operation expenses. These 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 labor costs for administrative staff and bookkeepers.
Equipment
The tools and equipment needed for construction projects. This can include anything from cranes to jackhammers.
How do you calculate overhead costs in construction?
To calculate construction overhead costs, first determine your indirect business expenses and compare them to your direct project costs. The resulting percentage can be used to estimate overhead on future projects.
Step 1: Identify all indirect overhead costs
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 direct project costs
Calculate all direct costs for the specific project. You’ll figure this out by estimating your job, including material and labor costs.
Step 3: Determine your overhead rate
Many contractors calculate overhead rate by dividing total overhead costs by total direct project costs over a specific period.
Divide your overhead costs by your direct expenses to determine your overhead rate. This percentage provides a general estimate, though some projects may experience more overhead than others.
Step 4: Apply the rate to future projects
Use the percentage rate to calculate overhead for future projects. Once you know 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.
What’s a healthy profit margin in construction?
A construction profit margin is the percentage of revenue remaining after all project and business expenses are paid. Tracking profit margins helps contractors evaluate financial performance and plan for sustainable growth.
Profit margin and markup are closely related but different. Markup is the amount added to costs when pricing a project, while profit margin is the percentage of revenue that remains after all costs have been paid.
General contractor markups help ensure projects contribute to healthy profit margins.
Construction profit margins vary by market, trade and project type. Many contractors operate with single-digit margins, while top-performing companies often target profit margins above 10% to create room for growth and unexpected costs.
What hurts a business? Paying more for services than you charge customers. Managing cash flow, project volume and profit is vital to keeping your business successful.
Webinar: Cash flow is a strategy: See how top-performing builders improve financial stability by tightening cash flow processes, accelerating payments and maintaining better control over project finances. Strong cash flow management helps contractors protect margins and reduce financial stress across projects. Watch now.
How do you calculate profit margins on construction projects?
Construction profit margin is calculated by comparing project revenue to total project costs. Knowing your profit margin helps determine whether projects are contributing to long-term business growth.
To calculate construction profit margin, subtract your total project costs from your project revenue to determine profit. Then divide that profit by total revenue and multiply by 100.
Profit Margin = (Revenue − Costs) ÷ Revenue × 100
Example of calculating construction profit margin
- Project revenue: $10,000
- Material and labor costs: $8,000
- Overhead: $1,000
- Total costs: $9,000
Profit Margin = ($10,000 − $9,000) ÷ $10,000 × 100
Profit Margin = $1,000 ÷ $10,000 × 100
Profit Margin = 10%
Why are profit margins important for construction businesses?
Profit margins provide a clear view of a company’s financial health. Strong margins help contractors reinvest in growth, manage unexpected costs and maintain long-term stability.
A profit margin is a prime indicator of a construction company’s financial health. The higher your profit margin, the more profitable your business becomes. Understanding how to calculate profit margins helps ensure that projects generate income after all costs are covered.
Construction profit margins vary significantly depending on project type, trade and market conditions. Many contractors aim for profit margins above 10% to support long-term growth and account for fluctuating expenses.
Managing changing construction costs and inflation isn’t easy. Tracking profit margins helps contractors make informed decisions and respond more effectively when costs increase.
Controlling profit margins can also help stimulate business growth. A well-developed construction business plan can help you establish healthy margins and avoid paying out-of-pocket expenses.
“The financial aspect of Buildertrend was huge for us, with our consultant helping to streamline and understand the accounting side.” – Amanda, co-owner, Casey Construction Company
How can contractors reduce overhead costs and improve profit margins?
Reducing overhead starts with improving operational efficiency and maintaining visibility into project finances. Better estimating, budgeting and project management processes can help contractors protect margins without sacrificing quality.
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.
A few examples of construction overhead expenses include rent, advertising, accounting fees, payroll, insurance, utilities, materials, legal fees and vehicles.
10% is the typical overhead percentage, but this can vary depending on the size of the project. A larger project would warrant a higher overhead percentage.
The average profit margin in construction is typically 6%. However, you should aim for a 10% profit margin to ensure your business stays profitable and you don’t have to pay out-of-pocket for expenses.
How can Buildertrend help improve construction profitability?
Buildertrend helps contractors track costs, manage budgets, improve estimating accuracy and monitor profitability throughout the project lifecycle. By keeping financial information in one place, builders can make faster decisions and reduce costly surprises.
Buildertrend offers financial tools designed to help contractors improve construction profit margins and maintain financial visibility throughout a project.
Estimating and bidding tools help keep job costing accurate and simplify subcontractor communication. Contractors can calculate and compare numbers within one organized platform.
Buildertrend’s budgeting tools update job costs in real time, giving teams immediate insight into project financial performance. Detailed budgets help keep projects profitable and reduce the likelihood of unexpected expenses.
All project data remains stored in Buildertrend for future use. Historical information helps contractors estimate future projects faster and run reports that identify where money may be lost.
Ready to improve your bottom line and gain better control of construction overhead costs? Schedule a demo today.
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