How to Calculate Overhead Percentage and Recover It in Pricing
Overhead percentage is your indirect costs divided by an allocation base — usually revenue, direct labour or total direct cost. It tells you how much of every sale is consumed by keeping the business open before any profit is earned.
Direct versus indirect
- Direct: materials, subcontractors and labour traceable to one job.
- Indirect: rent, utilities, insurance, admin salaries, software, vehicles, marketing.
- If you cannot point the cost at a single job without guessing, it is overhead.
Picking an allocation base
Labour-intensive trades allocate on direct labour hours or cost, because overhead grows with crew time. Product businesses often allocate on revenue or machine hours. What matters most is consistency: switching bases between quotes makes margin comparisons meaningless.
Recovering overhead in a price
Price = direct cost + overhead allocation + profit. Note that a 25% overhead rate on revenue is not a 25% markup on cost: to recover 25 of overhead from a 75 direct cost you must mark up by 33%. Confusing the two is the most common reason a business that quotes 'cost plus 25%' never makes its target margin.
Reducing the rate
- Grow the base — more revenue over the same fixed cost lowers the rate.
- Convert fixed cost to variable where demand is uneven.
- Review subscriptions, unused space and insurance annually.
- Reclassify genuinely traceable costs as direct so quotes carry them explicitly.
Key takeaways — Overhead Percentage Calculator
- Overhead % = indirect cost ÷ allocation base × 100.
- A percentage of revenue is not the same as a markup on cost.
- Choose one base and apply it to every quote and job review.