What overhead costs are
Within the unit price, the direct cost is what can be measured per unit of the item: the materials, labor and equipment that end up in that m², that m³ or that piece. Overhead is everything else the work needs in order to exist but that cannot be charged directly to an item: the superintendent’s salary, the office rent, insurance, bonds, stationery, the accountant.
That is why it is not priced per unit but spread out: you add up all the overhead and turn it into a percentage applied on the direct cost of every item. In this way, each unit price “carries” its proportional share of those general costs.
Overhead is different from financing (the cost of money while the client has not yet paid you) and from profit (your margin). All three are applied after the direct cost, but they are separate concepts and must not be mixed.
Field overhead vs. home-office overhead
Overhead splits into two big groups, and confusing them is a classic mistake that leaves real cost uncounted:
- Field overhead (site overhead): the costs that occur on site and exist only because that project is running. They include technical management and supervision (resident engineer, superintendent, foreman), the site camp and field offices, storage, security, communications, project consumables, small tools and safety equipment. When the project ends, that cost disappears.
- Home-office overhead (general and administrative): the costs of the business itself, which exist whether or not you have that project. They include general management, administration, accounting, office rent and utilities, legal and tax fees, the bidding department and depreciation of office equipment. This cost is spread across every project the company runs during the year.
- Bonds, insurance and payroll taxes also count as overhead, and depending on the case they may sit in field or in home-office overhead.
How to calculate the overhead percentage
The overhead percentage is not made up and it is not copied: it is calculated. The logic is simple: you add up all the overhead and divide it by the direct cost it will be spread across.
Overhead percentage = (Total overhead ÷ Total direct cost) × 100.
For home-office overhead, the calculation is usually done on an annual basis: you take the office’s expense budget for the year and divide it by the volume of work (direct cost) the company expects to build in that same year. For field overhead, you estimate the project’s site costs and divide them by the direct cost of that project.
The result is a single percentage (or two, added together) applied to every item. That is why a company that bills little spreads its office costs over less work and tends to have a higher percentage than a large company: it is not that it spends more, it is that it has less direct cost to spread it over.
A worked example
Suppose a small contractor that expects to build $10,000,000 of direct cost this year. Its home-office costs for the year (management, administration, rent, accountant, bidding) add up to $900,000.
Home-office overhead = 900,000 ÷ 10,000,000 = 9%.
For a specific project of $2,000,000 in direct cost, its field overhead (superintendent, site office, security, bonds for that project) is estimated at $120,000.
Field overhead = 120,000 ÷ 2,000,000 = 6%.
The total overhead to charge on that project’s unit prices is 9% + 6% = 15%. So an item with a direct cost of $2,600 per m³ of concrete carries $2,600 × 0.15 = $390 of overhead, landing at $2,990 before financing and profit.
Change any assumption —less work in the year, more people in the office— and the percentage changes. That is the whole point: overhead is specific to each company and each moment.
Overhead on public works
On public works, the rules that govern how a unit price is built spell out how overhead must be treated, and it comes with explicit requirements.
Public-procurement regulations define overhead as the general expenses needed to carry out the work that are not included in the direct costs, and they split it precisely into home-office administrative overhead and field (site) administrative overhead. The rules even list the line items that may be considered in each one (fees and salaries of management and technical staff, depreciation, rent, freight, insurance and bonds, among others).
The golden rule is that the same expense cannot be counted twice: whatever is already in the direct cost, in financing or in profit cannot be put back into overhead. That is why bid proposals require you to itemize overhead and tend to reject charges that do not belong or that duplicate items. Submitting inflated or badly built overhead is grounds for a query —or for disqualification— in a public tender.
Common mistakes when charging overhead
These are the ones that repeat the most and cost the most:
- Forgetting home-office overhead and charging only field overhead: the business ends up absorbing administration, rent and accounting without billing for them.
- Copying the percentage from another estimate or another company, instead of calculating it from your own real costs.
- Duplicating items: putting into overhead something already accounted for in the direct cost, in financing or in profit (which on public works is flagged immediately).
- Not updating the percentage when the year’s volume of work changes: less contracted work demands a higher percentage to cover the same office costs.
- Hiding profit inside overhead so it goes unnoticed; in an itemized tender this stands out and compromises the proposal.