Overhead and Profit in a Construction Estimate
Overhead is what it costs you to run the job and the business, and profit is what is left for the risk you took. Both sit on top of the direct cost of the work, and both are added as a percentage that is easy to get wrong.
Applies to every bid, from a single trade package to a full industrial project.
How Overhead and Profit Get Added
A bid is built from the bottom up. The direct cost comes off the takeoff, then two layers of overhead are added, then profit.
Price the Work Itself
Labor, material, equipment and subcontracts, priced from the takeoff. This is the only layer that comes straight off the drawings, and everything above it is a percentage of it, so an error here is multiplied by everything that follows.
Add Field and Home Office Overhead
Field overhead is what it costs to run this job: supervision, temporary facilities, site vehicles, safety and the rest of the general conditions. Home office overhead is your share of running the business, such as rent, estimating and accounting.
Add Profit and Check Markup Against Margin
Profit is added last, as a percentage. This is where markup and margin get confused, because a percentage added to cost is not the same percentage of the price you end up charging.
Direct Cost, Overhead and Profit
Overhead splits into two layers that behave differently. Field overhead scales with the job and is usually priced from the general conditions, while home office overhead is recovered across every job you win in a year.
- Field overhead is priced like work, item by item, from the general conditions.
- Home office overhead is a rate applied across the year's turnover, so it depends on how much you win.
- Markup is a percentage of cost, margin is a percentage of price, and they are never equal.
| Layer | What It Covers | How It Is Added |
|---|---|---|
| Direct Cost | Labor, material, equipment and subcontracts for the work itself | Priced from the takeoff |
| Field Overhead | Supervision, temporary facilities, site vehicles, safety, the general conditions | Priced item by item for this job |
| Home Office Overhead | Rent, estimating, accounting, the cost of running the business | A percentage rate recovered across the year |
| Profit | The return for carrying the risk of the job | A percentage added at the end |
| Markup | A percentage added on top of cost | Cost multiplied by one plus the rate |
| Margin | The same money expressed as a share of the price | Profit divided by the price charged |
Everything Above the Takeoff Is a Multiple of It
Overhead and profit are percentages of the direct cost, so whatever the takeoff gets wrong gets amplified on the way to the bid price. Understate the quantities and you understate the overhead recovery and the profit along with them. The commercial layers can only be as sound as the number they sit on.
| Direct cost | $3,180,000 |
| Field overhead | $382,000 |
| Home office overhead | $254,000 |
| Profit at 10% markup | $381,600 |
| Price bid | $4,197,600 |
| Margin on price | 9.1% |
The Takeoff AI counts and prices the direct scope from the drawings, so the base the percentages are applied to has been checked line by line. Each item is highlighted on the drawing with an accept or reject option, and the takeoff comes back as a priced bill of materials.
- Direct scope counted and priced, traced to the sheet
- Material and labor takeoff split out so overhead is applied to the right base
A 10% Markup Is Not a 10% Margin
Add 10% to a cost of $100 and you bid $110, but the $10 you made is 9.1% of what you charged, not 10%. To actually keep 10% of the price you have to mark up by 11.1%. On a four million dollar bid that gap is tens of thousands of dollars, and it is lost quietly because both numbers get called ten percent in the same meeting.
“Markup is a percentage of what it cost you, and margin is a percentage of what they paid you.”
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Reference the Estimating Library
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Overhead and Profit in a Construction Estimate
Overhead is the cost of running the job and the business, and profit is the return for taking the risk. Both are added on top of the direct cost of the work.