Which rate should you use?
- Per billable hour suits service businesses and trades where overhead relates mostly to time.
- Per labor dollar suits businesses with crews on different wages, where a more senior worker's hour typically consumes more support and supervision.
- Share of revenue is good for a quick trend check and for comparing periods, but it is less precise for pricing an individual job.
The formulas
Per billable hour
Overhead per hour = Overhead ÷ Billable hours
Per labor dollar
Labor rate % = Overhead ÷ Direct labor cost × 100
Share of revenue
Revenue rate % = Overhead ÷ Revenue × 100
Worked example
A small crew has $8,000 of monthly overhead, $20,000 of direct labor, 640 billable hours and $50,000 of revenue.
- Per billable hour: $8,000 ÷ 640 = $12.50.
- Per labor dollar: $8,000 ÷ $20,000 = 40%.
- Share of revenue: $8,000 ÷ $50,000 = 16%.
A job needing 30 hours should therefore carry about $375 of overhead on top of its direct costs and profit.
Getting the inputs right
Overhead consists of the costs you would still pay if you did not take on a particular job. If a cost can be traced directly to one job, such as materials or a subcontractor, charge it to that job and leave it out of overhead, or you will count it twice.
Use a period that reflects normal activity. Dividing overhead by the hours from an unusually busy month gives a rate that is too low for the rest of the year. Many businesses use a full year of expected costs and hours, then revisit the numbers once or twice a year. The business expense calculator can help you assemble the total.
Frequently asked questions
What is the difference between overhead and direct costs?
Direct costs can be traced to a specific job or product, such as materials. Overhead supports the whole business, such as office rent and bookkeeping.
What is a good overhead rate?
It depends on your trade and business model. A lower rate is not automatically better, since well-chosen spending on marketing or systems can pay for itself. Focus on whether your prices cover it and how it trends over time.
Why do I need to enter only some of the fields?
Each rate needs only overhead and its own base. Fill in what is useful to you; a rate with no base simply shows a dash.
How often should I recalculate?
Revisit it when a major cost changes, such as a new lease or hire, and at least once a year. Then check that your quoted rates and selling prices still cover it.