The Overhead Secret That Separates Profitable Trades From Broke Ones
Two plumbers with the same billing rate. One is profitable. One wonders where the money goes every quarter. The difference is almost always overhead — one knows what it costs to run their business per hour, and one is guessing.
The Number Nobody Calculates
Overhead per billable hour is the cost of keeping your business running divided by the hours you actually bill. It is the floor your billing rate must clear before you make a dollar of profit. Most tradespeople have never calculated it. They set their rate by what competitors charge or what customers will pay. That method works until it does not — usually during a slow quarter when the bills still come.
What Goes Into Overhead
Everything except direct job labor and direct job materials: truck payment, fuel, insurance (GL, commercial auto, workers comp, health if self-employed), tools and equipment replacement, phone, software, accounting, licensing and continuing education, advertising, and unbillable time. That last one is the one most people forget — time spent driving to quotes, doing paperwork, handling callbacks, and waiting at supply houses does not go on an invoice but does come out of your capacity.
For a solo tradesperson with a truck, typical overhead runs $40,000–$70,000/year. For a two-person operation with two trucks and one employee, $120,000–$180,000 is normal before owner compensation.
The Calculation
Overhead per hour = total annual overhead ÷ annual billable hours
Example: $55,000 overhead ÷ 1,200 billable hours = $45.83/hr overhead cost. If you want $60/hr in owner compensation and a 20% profit margin, your billing rate needs to be at minimum $45.83 + $60 = $105.83, divided by 0.80 to account for margin = $132.29/hr. Most solo tradespeople billing $95–$110/hr are not covering this math.
Use It to Set Rate, Not Just Understand It
Use the Overhead Per Hour Calculator to enter every overhead line item and your billable hour estimate. The calculator gives you overhead per hour and the minimum billing rate needed to cover overhead plus your target compensation and profit margin. Run it annually when you set rates. Run it again when anything changes — new truck, new hire, new insurance renewal. The number moves. Your rate needs to move with it.
Frequently Asked Questions
What counts as overhead for a trade business?
Overhead is every cost that is not direct labor or direct materials on a specific job: truck payment and operating costs, insurance (liability, workers comp, commercial auto, health), tools and equipment, phone and software, advertising, accounting, licensing, training, and office costs. For solo tradespeople, overhead typically runs $40,000–$70,000/year.
How do you calculate overhead per billable hour?
Total annual overhead ÷ annual billable hours. If your overhead is $55,000 and you bill 1,200 hours/year, your overhead cost is $45.83/hr. Your billing rate must cover this plus direct labor plus profit margin.
What is a healthy overhead percentage for a trade business?
Overhead as a percentage of revenue typically runs 25–40% for solo and small trade businesses. Higher than 45% is a margin problem. Lower than 20% often means something is not being counted (especially for owner-operators who forget to cost their own time fully).
How often should I recalculate my overhead per hour?
At minimum annually, before setting rates for the year. Also recalculate when you add a truck, hire an employee, take on a lease, or change your billable hour capacity significantly. Your overhead per hour changes whenever either the numerator (total overhead) or denominator (billable hours) changes.