Overhead and Profit Calculator (O and P)
Ten and ten is the phrase everybody uses and almost nobody applies correctly. Adding 20 percent to your cost does not give you 20 percent overhead and profit, it gives you 16.7, and the missing 3.3 points comes out of your profit every single time.
Worked example
These are the figures the calculator opens with and the answer it gives. Change anything above and every number below moves with it.
- Direct job cost: material, labor, subs, equipment24000 $
- Overhead recovery15 %
- Profit you want to keep10 %
Price the job at$32,000.00
| Direct job cost | $24,000.00 |
|---|---|
| Overhead recovered at 15% | $4,800.00 |
| Profit at 10% | $3,200.00 |
| Price | $32,000.00 |
| Markup this equals | 33.3% |
| If you had added the percent to cost instead | $30,000.00short by $2,000.00 |
What this calculator assumes
- The classic 10 and 10 is overhead 10 percent and profit 10 percent. Almost nobody's overhead is actually 10 percent, so work out your own: last year's overhead divided by last year's revenue.
- Both numbers here are treated as margins, taken out of the price, not markups added to cost. That is the conservative reading and it is the one that leaves you whole.
- The wrong way, adding 25 percent to cost and calling it 25 percent O and P, leaves you 5 percentage points short on a $24,000 job. The comparison is below.
Where 10 and 10 came from and why it probably is not yours
Ten percent overhead and 10 percent profit is an insurance restoration convention that leaked into general contracting. It is a default a carrier will accept without argument, not a measurement of your business.
Your real overhead is last year's overhead divided by last year's revenue. Rent, insurance, the office, the estimator, the truck that does not go to jobs, software, accounting, marketing. For most small contractors it lands between 12 and 25 percent, and it goes up, not down, as the company grows, because that is what overhead is.
Use the real number. A company with 22 percent overhead applying 10 percent overhead is running a 12 point loss on every job and blaming the market.
Margin, not markup, and the arithmetic that proves it
To recover 25 percent of the price for overhead and profit, divide the cost by 0.75. On a $24,000 cost that is $32,000, and $8,000 is exactly 25 percent of $32,000.
Add 25 percent to the cost instead and you get $30,000. The $6,000 is 20 percent of the price, not 25. You are $2,000 short and you will not notice, because the job still looks like it made money.
Repeat that on forty jobs a year and it is a six figure hole. This calculator shows both numbers side by side so the gap is visible rather than theoretical.
Questions people ask
What does 10 and 10 mean in construction?
Ten percent for overhead and 10 percent for profit added to the job cost. It is an insurance restoration convention, not a measurement of your actual overhead.
Is overhead and profit added to cost or taken from price?
It should be taken from the price. Dividing cost by one minus the rate recovers the full percentage. Adding the percentage to cost recovers less than you intended, every time.
What is a normal overhead percentage for a contractor?
Between 12 and 25 percent of revenue for most small to mid sized contractors. Work out your own from last year's books rather than using a rule of thumb.
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Common sizes, worked out
The same calculator with the numbers already filled in, one page per size, each ending in its own material list.