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.
Accurate calculations matter because overhead expenses can impact all of the following:
Residential contractors typically have two different kinds: home-office overhead and field overhead. We have listed a description and examples for each type below.
These are legitimate contractor overhead costs that are necessary to support your operation as a whole.
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.
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.
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.
Read more: How specialized construction apps can help with your next residential job.
Now let’s move on to the second category…
These are the costs your business incurs to support operations in the field, but typically not costs associated directly with a particular project.
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.
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.
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).
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.
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.