Overhead: the cost of being in business
Overhead is everything you spend to keep the doors open that isn't tied to a specific job. It splits into two kinds:
- General (indirect) overhead. Office rent, software, accounting, insurance, marketing, your salary as owner-operator, the truck payment, the phone bill. These exist whether you have one job or ten.
- Job overhead (general conditions). Costs tied to a project but not to any one trade: permits, dumpsters, temporary power, site supervision, portable toilets. Some contractors line-item these directly instead of burying them in the markup.
To recover general overhead, you spread it across the work you expect to do. If your annual overhead is $120,000 and you expect $1,000,000 in job costs, your overhead rate is about 12%. Every job needs to carry roughly that much to keep the lights on.
Profit: planned, not leftover
Here's the mindset shift that separates thriving contractors from busy ones: profit is a line item, not what's left over. If you treat profit as "whatever remains after the bills," it has a way of disappearing. Instead, decide the profit margin the job must earn and build it into the price. Profit is your compensation for risk, for tying up capital, and for the possibility a job goes sideways.
The "10 and 10" rule of thumb
You'll hear "10 and 10" (10% overhead and 10% profit) thrown around, and insurers often use it on restoration work. It's a reasonable starting reference, but it's a rule of thumb, not a law:
- Small residential remodelers frequently need more than 10% overhead to cover a lean office.
- Profit expectations vary widely by market, risk, and how much value you bring.
- The right total O&P markup for many small GCs lands anywhere from the low teens to 25% or more.
Don't inherit someone else's numbers. Calculate your own overhead rate from your actual expenses, then add the profit your business needs to grow.
Markup vs. margin: the trap
The most expensive O&P mistake is confusing markup and margin. If you add "20% for O&P" as markup on cost, your actual profit margin on the sale price is only about 16.7%, not 20%. That gap compounds across every job. Before you set any O&P number, read the anchor guide: Markup vs margin: how contractors price a job. It's the single most important pricing concept in this cluster.
Applying O&P to a job
The clean sequence:
- Total your direct costs: burdened labor, materials, equipment, subs.
- Add job overhead (general conditions) if you track it separately.
- Apply your general overhead rate.
- Add your profit margin.
The result is your bid. Keep each layer visible so you can see exactly what covers the business and what's genuinely yours to keep.
O&P isn't one-size-fits-all
A high-risk, complex job should carry more profit than a simple, repeatable one. That's why many contractors flex O&P, especially profit, by job type and trade. See how to set your markup by trade for that next step, and use the Construction Price Index to keep your underlying cost assumptions realistic.
Where this fits
Overhead and profit sit at the heart of the budgeting and job costing cluster and feed directly into sound construction project management. You can't manage to a margin you never built in.
Put it to work
The free estimating tool lets you layer overhead and profit onto a costed job so your price reflects the whole business, not just the labor and materials. TradesMetrics then tracks whether that margin holds as the job runs. See how it works.