Guides / Money
Overhead, and how to recover it
Overhead is the cost of being open. It does not care whether you worked this week, and there is nowhere for it to come from except the jobs you sell — so it has to be in the price, deliberately, rather than absorbed out of whatever is left.
What counts
If the cost would still exist on a week with no jobs, it is overhead. If it only exists because a specific job exists, it is a direct cost.
- Vehicles: payments, fuel, insurance, maintenance
- Business insurance and licensing
- Phone, internet, software, subscriptions
- Advertising, website, lead sources
- Office or yard rent, storage
- Bookkeeping, accounting, legal
- Non-billable wages: your own time estimating, scheduling, chasing payment
- Tools and equipment that are not job-specific
- Bad debt and warranty callbacks, which are real and usually unbudgeted
Your overhead rate, in one calculation
Take last year's total overhead and divide it by last year's revenue. If overhead was $108,000 on revenue of $600,000, your overhead rate is 18 percent. Eighteen cents of every dollar you quote is already committed.
If you do not have clean books for this, that is the first problem to fix — you cannot price around a number you do not know, and every method below needs it.
Two ways to recover it
As a percentage of price. Simple and works well when your jobs are reasonably similar. Price = direct cost ÷ (1 − overhead% − margin%). This is the method in the estimating walkthrough.
As an hourly burden. Divide annual overhead by annual billable hours and add that to your loaded labor rate. This is fairer when your jobs vary a lot in how labor-intensive they are, because overhead tends to track time rather than price.
Either is defensible. Using neither is not, and that is the common case.
The trap: growing revenue without growing margin
Overhead is mostly fixed in the short run and then steps up — another truck, another phone, a coordinator. Companies grow revenue, feel the strain, add overhead to cope, and discover the extra revenue was priced at the old overhead rate.
Recalculate the rate whenever you add a fixed cost, and price the next job at the new number rather than the one you are used to.
Your own time is overhead
The hours you spend estimating, scheduling, invoicing, chasing payment and answering the phone are not free. If you do not cost them, you are subsidizing the business out of your own labor and calling the result profit.
This is also the best argument for measuring how long your administrative work takes: an estimate that takes ninety minutes to produce costs real money, and it costs it whether or not you win the job.
Questions
What is a typical overhead rate for a painting company?
The only one that matters is yours: last year's overhead divided by last year's revenue. Published averages do not describe your truck payments, your insurance or your lead costs.
Is my own wage overhead or direct cost?
Split it. Time on the tools is direct cost on that job; time estimating, scheduling and invoicing is overhead.
Should overhead be a percentage of price or an hourly burden?
Percentage of price is simpler when jobs are similar. An hourly burden is fairer when jobs vary a lot in labor intensity, because overhead tends to track time more than price.
Where this stops being arithmetic
Aerys prices a job from your own catalog and production rates, sends it with an accept link and the invoice already attached, and then compares what the job actually cost against what you quoted — by task, while the job is still running.