Overhead and Profit: What Contractors Actually Charge

Every contractor bid includes overhead and profit, and every homeowner who has sticker shock over an hourly rate is missing the bigger picture. Overhead and profit are not padding or greed baked into a quote. They are the cost of keeping a legitimate contracting business alive, insured, licensed, and ready to do your project right.

This post breaks down exactly what overhead includes, what profit should look like, how to calculate O&P on any job, and why these numbers exist in the first place.

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Quick Answer

Overhead and profit (O&P) is the markup contractors add to direct job costs to cover business operating expenses and earn a return on their work. Industry benchmarks run 15-35% for specialty contractors and 10-50% for general contractors, with 20-25% being the most common target. If you skip O&P, you are slowly going broke while staying busy.

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What Does Overhead Actually Include?

Here is where homeowners get tripped up. They look at a $95/hr labor rate and think about what they earn at their own job. They do not see the list of line items sitting behind that number.

Overhead is every cost that keeps the business running whether a job is happening or not. It is fixed, recurring, and relentless.

Common overhead categories for a contractor:

Category	Examples
Insurance	General liability, workers’ comp, tools/equipment
Vehicles	Truck payment, fuel, maintenance, registration
Tools & Equipment	Power tools, ladders, trailers, repairs, replacements
Licensing & Bonds	State contractor license, bond premiums, renewals
Office & Admin	Estimating software, accounting, phone, internet
Marketing	Website, ads, yard signs, business cards
Warranty & Callbacks	Time spent fixing issues after a job closes
Payroll Overhead	FICA, unemployment tax, paid time off

A contractor working alone with a single truck might have $4,000-$7,000/month in overhead before touching a single nail. A crew with multiple vehicles, employees, and a shop could be at $20,000+/month.

That overhead does not pause when a job ends or when it rains for a week. It bills every 30 days regardless.

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What Is Profit and Why Does It Matter?

Overhead keeps the lights on. Profit is what makes running a business worth it.

Profit is the money left after paying all costs, including overhead. It is what allows a contractor to reinvest in better tools, hire good employees, weather a slow month, and eventually build something beyond trading hours for dollars.

Without profit, you have a job, not a business. And if that job comes with all the stress, liability, and risk of running a business, you are getting a bad deal.

Net profit targets for contractors typically run 8-15% of revenue. Some specialty trades with high demand or narrow competition push higher. The point is that profit is planned and built into every bid on purpose, not hoped for at the end.

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How to Calculate Overhead and Profit

There are two common methods: markup on cost and margin on revenue. They produce different numbers, and mixing them up is one of the most expensive mistakes in contracting.

Markup adds a percentage to your direct costs:

Direct Cost x (1 + Markup %) = Bid Price

Margin is profit as a percentage of the bid price:

Profit / Bid Price = Margin %

A 25% markup on a $10,000 job yields a $12,500 bid. But a 25% margin means the profit is 25% of $12,500, which requires a 33% markup on cost to achieve.

The Contractor Markup Calculator handles this math so you never mix up markup and margin mid-estimate. It is worth bookmarking.

Worked Example 1: Small Bathroom Remodel

Item	Amount
Materials	$3,200
Labor (direct)	$4,800
Subcontractors	$1,000
Total Direct Cost	$9,000
Overhead (15%)	$1,350
Profit (10%)	$900
Total Bid	$11,250

In this case the O&P combined equals about 25% of direct costs. The homeowner sees $11,250. The contractor clears $900 in profit after covering all overhead, which covers maybe two or three slow days in that billing cycle.

Worked Example 2: Full Kitchen Renovation

Item	Amount
Materials	$18,000
Labor (direct)	$12,000
Subcontractors (plumber, electrician)	$6,000
Total Direct Cost	$36,000
Overhead (18%)	$6,480
Profit (12%)	$4,320
Total Bid	$46,800

The homeowner who questions the $46,800 quote needs to understand that $6,480 of that number goes directly to keeping the business operational. The contractor takes home $4,320 for managing a multi-week project with subcontractors, permits, inspections, and warranty exposure.

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Industry Benchmarks for O&P

These are real-world ranges pulled from contractor industry data. Your actual numbers will depend on your region, trade, overhead load, and business structure.

Contractor Type	Overhead Range	Profit Range	Combined O&P
Specialty Contractor (solo)	10-20%	8-15%	15-35%
Specialty Contractor (crew)	15-25%	10-15%	20-35%
General Contractor	15-30%	10-20%	10-50%
Restoration / Insurance Work	20% flat	10% flat	30% (standard)

Restoration and insurance work uses a standardized 20% overhead + 10% profit, which is widely accepted in the industry and built into most estimating platforms. If you are doing any insurance restoration work and not charging the full 10/10, you are leaving money on the table that the adjuster already has budgeted for you.

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Why Homeowners Do Not Get It (And What to Say)

The most common version of this conversation: a homeowner gets a quote, sees a $100/hr labor rate, and says something like “I only make $30/hr at my job, why am I paying this?”

They are comparing the wrong things.

When you work a W-2 job, your employer pays your taxes, your benefits, your tools, your training. You show up, do the work, and collect a paycheck. The employer handles every cost on top of your wage.

A contractor running their own business pays all of that themselves, plus:

• The truck that gets them to your house
• The insurance that protects your property if something goes wrong
• The license that legally authorizes them to do the work
• The callbacks when something needs adjustment after the job is done
• The slow weeks when there is no billable work but the overhead keeps running

When a homeowner understands that the “hourly rate” is actually paying for all of that, the number starts to make more sense.

A direct way to frame it: “I charge $95/hr because by the time I cover my insurance, truck, tools, license, and keep the lights on, I need that rate just to break even. The profit on top of that is what makes it worth running a business instead of working for someone else.”

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Common Mistakes Contractors Make With O&P

1. Estimating without separating overhead from profit. Many contractors lump everything into a single markup number without knowing how much is overhead coverage and how much is actual profit. When costs rise (fuel, materials, insurance), there is no visibility into where the squeeze is happening.

2. Using margin percentage when you mean markup percentage. These are not the same number. A 25% margin requires a 33% markup on cost. Calculating bids with the wrong method can cost thousands per job. Read more in Markup vs Margin for a clear breakdown of the difference.

3. Forgetting to account for non-billable time. Driving, estimating, shopping for materials, warranty callbacks, administrative work. None of these are direct job hours, but all of them eat into your week. That time needs to be funded by overhead recovery.

4. Competing on price by cutting O&P. Dropping your O&P to win a bid is borrowing from your own business. You win the job, do the work, and quietly fall behind on your expenses. The bid that felt like a win slowly drains the account.

5. Not revisiting overhead annually. Overhead changes. Insurance goes up. Fuel goes up. You add a new truck or hire help. If you set your overhead percentage two years ago and never updated it, your bids may be systematically underfunded.

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Pro Tips for Managing O&P

• Calculate your monthly overhead total first. Add up every fixed and semi-fixed business expense for a typical month. Divide by your average monthly billable revenue. That percentage is your minimum overhead recovery rate.
• Track profit by job, not just by year. Some job types will consistently hit your profit target. Others will not. Job-level tracking shows you where to adjust scope, pricing, or process.
• Build a simple annual overhead budget. Even a spreadsheet with 12 line items is better than guessing. Insurance renewal dates, registration fees, and software subscriptions are predictable. Budget for them.
• When in doubt, charge more. You can negotiate down. You cannot un-submit a bid that leaves you underwater.

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Frequently Asked Questions

What is a typical contractor O&P percentage? For specialty contractors, 15-35% combined is the typical range. General contractors commonly run 20-30%. Restoration work uses a standard 20% overhead plus 10% profit per industry practice.

Is overhead and profit taxable income? Overhead recovery is a cost reimbursement, so it offsets your expenses. Net profit after all overhead and direct costs is taxable income. Talk to your accountant about how your business entity structure affects this.

How do I know if my overhead percentage is right? If you are consistently busy but not building cash reserves, your overhead recovery is probably too low or your profit margin is getting spent on costs you have not categorized correctly. Pull your monthly P&L and compare actual overhead spending to what your bids are recovering.

Should I show O&P as a line item on my estimate? That depends on your client and project type. Insurance restoration work typically shows O&P as a separate line because adjusters expect it. Residential remodeling estimates often fold it into unit pricing. Either approach works as long as your total bid covers your full cost structure.

What happens if I do not charge enough for overhead? You will be subsidizing your clients out of your own pocket. Every project that does not recover full overhead is a net loss even if it looks profitable on paper. Over time this is what causes otherwise busy contractors to wonder why they are always broke.

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How to Figure Out Your Real Labor Rate

Overhead and profit connect directly to how you set your hourly rate. If you want to see how your rate stacks up, How Much to Charge for Labor walks through the full calculation from your personal income goal down to what you need to bill per hour.

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Running a legitimate contracting business means carrying real costs every single day. Overhead and profit are not optional additions to a bid. They are the math that keeps a business alive and growing. Every contractor who has underbid a job, gotten busy, and still ended up short knows exactly what happens when O&P gets skipped.

Try EstimationPro free and build estimates that include accurate overhead recovery and profit targets on every bid from the start.