Overhead costs are the running costs of a construction business that cannot be charged to a single job: office rent, head office salaries, insurance, IT and professional fees. The business must pay them whether it is busy or quiet, so every job's price has to carry a share.
Worked example
| Annual overhead | Cost |
|---|---|
| Rent and utilities | £42,000 |
| Office and finance staff | £165,000 |
| Directors' salaries | £120,000 |
| Insurance | £38,000 |
| Vehicles and IT | £55,000 |
| Professional fees | £30,000 |
| Total | £450,000 |
With turnover of £6,000,000, overheads are 7.5% of turnover. Because the 7.5% is a share of turnover, a tender with £100,000 of direct cost and £5,000 of profit needs a price of about £113,500, which is £105,000 divided by 0.925.
Overheads take about £8,500 of that. Adding 7.5% to the cost gives £112,500 and under-recovers by about £1,000. The "overheads and profit" (OHP) uplift on a tender is built this way.
Overheads in the cost report
Overheads rarely sit inside a job's cost report. The usual pattern is to report job margin before overheads, then deduct the allocated share to see the contribution to company profit. Both views matter. A job at 10% before overheads and a company overhead rate of 7.5% leaves 2.5% for profit and risk.
Three points to watch:
- Do not count site costs twice. Site management, welfare and hoarding are preliminaries on the job, not overheads.
- Overheads are mostly fixed. If turnover falls, the rate per pound of turnover rises, so tenders priced at last year's rate under-recover.
- Track overheads against their own budget every month, not only at year end, so a creeping cost shows while you can still act on it.
Cutting overhead does help margin, but it is slow to act on. Most profit is won or lost in job cost, which is why overhead and job cost need separate reports.
Related terms
Overhead Allocation, Indirect Costs, Preliminary Costs, Markup, Direct Costs.
Planyard's job costing keeps each job's direct cost and margin apart from company overheads, so you can see which jobs carry the business before you apply the overhead rate.
