How to calculate your overhead costs and what each hour must cover

What overhead is

Overhead is the cost that keeps going whether or not a job is booked. Materials for one job are not overhead. They belong to that job. The truck, the phone and the insurance are overhead.

• Vehicle costs that are not tied to one job.
• Insurance and licences.
• Phone and internet.
• Shop or storage rent.
• Replacing and repairing tools.
• Bookkeeping and bank fees.

Work it out

1. Write each overhead cost with how often you pay it.
2. Change each one to a monthly figure. A yearly cost is divided by 12.
3. Add them up for a monthly overhead total.
4. Estimate the hours you can really bill in a month. Do not use every hour you work, because quoting, driving and paperwork are not billed.
5. Divide the monthly total by the billable hours. That is the overhead for each billable hour.

Worked example (made-up figures)

Monthly overhead adds up to $2,400. You bill 100 hours in a typical month. $2,400 divided by 100 is $24.

So every billable hour has to carry $24 of overhead, before your wage and your profit. If your wage target is $40 an hour, your rate is at least $64 an hour before profit.

In a slow month the same costs are spread over fewer hours, so the figure per hour goes up. That is why many owners check it again each season.

Keep tax lines apart

In general, Tax A and Tax B that you collect from customers are not your income, and they should stay out of your overhead total. Take the rules for your business from the official source.

Also leave out your own wage and any one-off purchase for a single job. Wage goes in your hourly rate, and the one-off purchase goes on that job's cost sheet. Keeping these apart makes the overhead figure honest, and an honest figure is the one that protects you.

Check your figures with the overhead cost calculator

Type the same figures into the overhead cost calculator if you want a second check. It is free to start, you type every figure yourself, and nothing is sent. Then use the result in your hourly rate.

Built in Canada for Canadian rules.