Pricing overhead on small construction jobs

The company

All numbers are invented.

• Annual overhead budget: $300,000 (office rent, office staff, estimating, accounting, insurance not tied to one job)
• Planned direct cost for the year: $2,500,000
• Planned number of jobs: 50, from small service work to one or two larger contracts

The flat rate is 300,000 / 2,500,000 = 12% of direct cost. Check: 2,500,000 x 0.12 = 300,000.

What the flat rate charges

Now ask what each job actually takes from the office. The estimate, the contract and insurance paperwork, setting the job up in accounting, monthly billing and closeout happen once per job whatever its size. On small work those steps can cost more than $2,400 of office time on their own.

A two-part rate

Split the overhead budget by what drives it. Suppose a review of last year shows about $100,000 of the overhead is per-job work: estimating, setup, billing and closeout. The other $200,000 (rent, the owner's salary, general insurance, equipment yard) scales with volume.

• Per-job charge: 100,000 / 50 jobs = $2,000 a job
• Volume rate: 200,000 / 2,500,000 = 8% of direct cost

Check that the year still recovers everything: 50 x 2,000 = 100,000, and 2,500,000 x 0.08 = 200,000, and 100,000 + 200,000 = 300,000.

Work the small job twice: 2,000 + 20,000 x 0.08 = 2,000 + 1,600 = 3,600. The larger contract: 2,000 + 400,000 x 0.08 = 2,000 + 32,000 = 34,000.

The small repair now carries $1,200 more overhead, and the larger contract carries $14,000 less. Under the flat rate the big bid was $14,000 heavier than it needed to be, which can be the margin between winning and losing it.

Pricing the small job

Add profit at 10% on cost plus overhead:

• Cost plus overhead: 20,000 + 3,600 = $23,600
• Profit: 23,600 x 0.10 = $2,360
• Price: 23,600 + 2,360 = $25,960
• Check: 23,600 x 1.10 = 25,960

That 10% is a markup on cost. As a margin on the price it is 2,360 / 25,960, about 9.1%. Check: 25,960 x 0.091 is about 2,362, within rounding. If you think in margin, see markup vs margin before you set the number.

Three things to watch

Job costs are not overhead. A small job's own truck time, permit, waste container and travel belong in its direct cost, not in the per-job charge. If they are in both places, the job is double charged. The job costing and overhead guide draws the line between job costs and company overhead.

The per-job charge depends on the job count. If the company does 40 jobs instead of 50, the $2,000 charge recovers 40 x 2,000 = $80,000, not $100,000. Rerun both parts each year, and check them midyear against actual volume.

A minimum charge is the same idea. Many contractors set a minimum price for any job. It is a blunt version of the per-job charge, and it works well for service calls.

Run your own numbers

The free overhead rate calculator works your overhead rate and a job bid on direct cost or direct labor. Run it once for the volume part of your overhead, then add your per-job charge by hand. The break-even calculator shows the sales volume that covers the whole overhead budget at your gross margin.

Where this sits for the exam

The bulletin lists subject areas, not topics. Our reading puts estimating, overhead and markup under Procurement and Contracting Requirements, the largest area on the exam. Expect the arithmetic to be one or two steps: a rate from a budget, the overhead on a job, a price from a markup. Write the steps in the same order each time and check with a second route, as above.

Try a few

Take the free check. It needs no signup and explains every answer, including the arithmetic. For the Procurement and Contracting lesson and practice questions with every step worked, see the plans.

Sources

• PSI Candidate Information Bulletin 1458, content outline, updated 7 Jul 2026. Retrieved 5 Nov 2026.
• All numbers are invented and were worked twice.

FAQ

Why do small jobs lose money on a flat overhead rate?

Each job needs estimating, setup, billing and closeout whatever its size, so a percentage of a small job's cost often falls short of the office time it uses.

What is a per-job overhead charge?

A fixed amount added to every job to recover the overhead that each job causes once, with a smaller percentage for the overhead that grows with volume.

Is the job's own truck and permit overhead?

No. Costs caused by one job are direct job costs. Company overhead is what no single job causes.