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Common Overhead Expenses for Contractors: What Not to Overlook

Written by Zuzanna Geib | Mar 11, 2022

Every residential contractor business must deal with overhead expenses. Yet, this subject matter can be murky and rather tricky, because it covers many different types of expenses. Some are clearly evident, and others… well, not so much.

So, let’s take a closer look at what business overhead is all about.

A Brief Definition
Contractor overhead expenses are general, indirect (hidden) costs that are not attributable to any single, specific contract. In other words, these are costs that are expended for the benefit of your entire business, to keep it open and operating. The amount of overhead your company incurs may increase or decrease based on changing work volume.

The Importance of Calculating Overhead Expenses Correctly

Accurate calculations matter because overhead expenses can impact all of the following:

  • how you should estimate projects to turn a profit
  • how you can identify opportunities to minimize overhead costs
  • how you determine deductible costs that can lower your business income taxes

Understanding the Different Types of Overhead Expenses

Residential contractors typically have two different kinds: home-office overhead and field overhead. We have listed a description and examples for each type below.

Home-Office Overhead Expenses

These are legitimate contractor overhead costs that are necessary to support your operation as a whole.

Facilities

  • Home Office Rent or Lease Payments – Obviously not applicable to any specific projects.

  • Facility Maintenance Expenses – Including professional office cleaning, professional floor-mat service to protect high-traffic areas, and extermination and snow-removal services.

  • Office Expenses – Utilities (electricity, gas and water), furniture, phones, computers, Internet service, office supplies and shop supplies. Essentially, whatever is required to run your company from its primary location. And, yes, that can even include kitchen supplies, beverages and food that you provide for the benefit of your employees.

  • Storage/Warehouse Space Fees – Payments to rent or lease a separate, nearby space for storing equipment or stockpiling materials.

Indirect Labor

As a subcategory, this is one of the largest overhead expenses for residential contractor businesses. It typically includes:

  • Office Staff Payroll – Salaries, employment taxes, benefits, bonuses, vacation, and retirement plans for full-time and part-time office employees who do not perform work at job sites (e.g., managers, administrative personnel, bookkeeping/accounting employees, human-resources employees, and salespeople).

  • Recruiting Costs – Expenditures necessary to fill existing or new positions.

  • Training/Personal Development Expenses – Fees pertaining to job-related office staff education such as online classes, in-person classes, fee-based webinars, or self-study courses.

Transportation

  • Fuel expenses – For general-purpose, company-owned vehicles (e.g., ones used by management and sales personnel).

  • Vehicle Buying/Leasing, Maintenance and Repair Expenses – For general-purpose, company-owned vehicles.

Miscellaneous Items

  • Advertising, Marketing and Promotion – Includes participation in home shows as well.
  • Bank Fees – Sometimes required for business banking accounts.
  • Charitable Contributions – Donations to local charities, schools, youth sports teams, etc.
  • Company Mobile Devices and Data Plans - The costs of owning and using mobile devices are fixed because these are paid on a regular basis.
  • Depreciation Expenses – Depreciation for fixed assets (such as office equipment) that fall under the “general cost of doing business” and are not associated with specific projects.
  • Government Fees and Licenses – Any special local or state requirements your company must meet to operate legally.
  • Indirect Materials Project materials that are used to complete jobs but are not easily traceable to a single job – such as staples, screws, nails, adhesives, caulk, painter’s tape and welding supplies.
  • Insurance – Business insurance necessary to keep your company operating, plus vehicle insurance, employee health insurance, worker compensation insurance, and unemployment insurance.
  • IT Assistance – Any technical service provided by an IT service provider to make sure your computers and servers are working properly and your data is secure.
  • Loan Interest – Related to company borrowings.
  • Professional Services – Any fees you pay to your attorney, your CPA, or an auditor. Be sure to keep track of all invoices your business receives.
  • Sales Expenses – Sales materials and tools that are used to acquire new customers.
  • Signage – For your building and company vehicles.
  • Subscription Fees – Including annual fees for industry magazines and any SaaS (Software as a Service) products that your office uses.
  • Taxes – On property, land or other company assets.

Read more: How specialized construction apps can help with your next residential job.

Now let’s move on to the second category…

Field Overhead Expenses

These are the costs your business incurs to support operations in the field, but typically not costs associated directly with a particular project.

Equipment/Tools Used for Multiple Jobs

This is considered to be broad-use equipment and, therefore, an indirect overhead cost. Consider everything that goes into owning that equipment, including depreciation, repairs, maintenance and insurance.

 

Indirect Labor

  • Supervisory Field Staff Payroll – Payroll expenses for estimators, supervisors or foremen – i.e., salaried employees who visit job sites but do not actually perform the work onsite.

  • Non-Job-Related Field Crew Costs – Payroll expenses paid to field personnel during slow periods or downtime, when they are not working directly on residential customers’ projects.

  • Recruiting Costs – Necessary to fill existing or new positions.

 

Transportation

  • Vehicles/Trailers Driven to Job Sites – Ones necessary for project estimation, supervision and completion

  • Travel Expenses The costs required for field employees to travel to and from long-distance work locations. These expenses may include gas, mileage and meals – even lodging if they must stay overnight in a hotel to complete a job. (One way to keep close watch over these expenses is to use online expense reporting software versus traditional paper expense reporting methods).

Miscellaneous Items

  • Drinking Water and Cups – Necessary hydration for onsite workers.

  • Dumpsters/Haulers – Ones your company owns and uses for any jobs that require a lot of demo work.

  • Enclosures or Structures – Any fencing, railings, ramps, barriers or other protective items that your company owns and uses at multiple job sites for safety reasons.

  • Personal Safety Gear – May include protective apparel, goggles, gloves, ear protection, masks, respirators, knee pads or steel-toe boots or shoes.

  • Versatile Mobile Devices for Field Personnel – Phones or tablets with data plans and apps that are necessary for multiple tasks, such as communication, floor-plan creation, photography and reporting.

Wrap-Up

Remember: Understanding and closely tracking overhead expenses is necessary for optimizing your company’s profitability. Doing so can help you estimate projects more accurately. It can help you identify opportunities to minimize overhead costs. And it can help you make the most of deductible expenses during the tax filing season.

So, go ahead. Take a deep dive into the nitty-gritty of your company’s overhead. That is sure to be time well spent, as it will help you boost your bottom line in the long run.


Read on if you're also interested in tips on how to get paid on time as a contractor.

Or continue with our guide on how to build a recognizable identity as a residential contractor business.