Overhead and Profit in Construction (O&P)

1. What “overhead and profit” actually means

Every job has direct costs — the labor, materials, subcontractors, and equipment that go into that specific project. But those costs don’t pay for your office, your truck, your insurance, your phone, the time you spend estimating jobs you don’t win, or your accountant. Those are overhead: the cost of having a business at all.

“Overhead and profit” is the markup you add on top of direct costs to cover two separate things:

• Overhead — your share of the indirect cost of running the company, allocated to this job.
• Profit — what’s left after every cost, including overhead, as your return for the risk and capital you put in.

The critical idea: profit is not what’s left after direct costs — it’s what’s left after direct costs and overhead. A job that “made money” over its materials and labor can still lose money once it carries its fair share of the office. That’s the trap O&P exists to prevent.

2. The two kinds of overhead (where people get confused)

There are really two buckets, and mixing them up wrecks pricing:

• Job (or general-conditions) overhead — indirect costs tied to a specific job: dumpsters, temporary power, site supervision, permits, project-specific cleanup. These belong in the job’s cost.
• Company (or general) overhead — the cost of the business existing: rent, office staff, vehicles, software, marketing, owner’s admin time, general insurance. This is what O&P’s “overhead” portion is meant to recover.

When people say “my overhead is 10%,” they almost always mean company overhead — and that’s the number most contractors guess instead of measure.

3. “10 and 10”: where it comes from, why it’s not a rule

“10 and 10” — 10% overhead, 10% profit — is most associated with general contractors on insurance restoration work, where a GC coordinates several trades and the figure became a rough industry convention. It’s a useful reference point. It is not a law of nature, and using it as your default is dangerous for one simple reason: your real overhead is whatever your real overhead is.

If your company overhead is genuinely 22% of revenue (very common for small remodelers once you count vehicles, software, and your own non-billable time), then charging 10% means every job underfunds the office by 12 points — and that gap gets paid out of your “profit,” your savings, or your next job’s deposit. The contractor in the case study above did exactly this.

4. How to calculate your real overhead rate

Stop guessing. The calculation is straightforward:

Overhead rate (% of revenue) = Annual company overhead ÷ Annual revenue

Add up a year of indirect costs — rent, office salaries, vehicles and fuel, insurance, software, marketing, professional fees, and your own non-billable owner time — and divide by revenue. If your overhead is $180,000 on $900,000 of revenue, your overhead rate is 20%, not 10%.

You can also express it as a markup on direct cost (overhead ÷ total direct job costs) if you price by marking up cost. Either way, the point is to use your measured number. The fastest way to pin it down is the overhead percentage calculator, and the deeper method is in the remodeling overhead guide.

5. Adding O&P to a bid without underpricing

Here’s the second trap, and it’s a math one: applying O&P as a markup is not the same as earning it as a margin.

If you add “20% overhead + 10% profit” by multiplying cost by 1.30, your margin on the final price is not 30%. On a $10,000 cost, cost × 1.30 = $13,000, and your combined O&P of $3,000 is only 23% of the $13,000 price. To actually keep 30% of the price for O&P, you divide:

Price = Direct cost ÷ (1 − target O&P %) → 10,000 ÷ 0.70 = $14,286

That difference ($13,000 vs $14,286) is real money, every job. This is the classic markup-vs-margin error — see the markup vs margin calculator to feel exactly how much it costs you, and what a good profit margin looks like for trade benchmarks.

6. O&P on insurance claims

On property-damage insurance work, general contractor O&P — frequently the “10 and 10” — is typically allowed when the loss is complex enough to require a GC to coordinate multiple trades (the common rule of thumb is three or more). The justification isn’t that you asked; it’s that coordinating trades is real, billable overhead and profit.

Two practical notes: (1) whether and how O&P is paid varies by policy and state, so document the trades and coordination involved; and (2) the adjuster’s “10 and 10” is their convention for the claim — it does not mean 10% is the right overhead figure for your business on regular, non-insurance work. Keep those two numbers separate in your head.

The throughline of all of this: O&P only protects you if the overhead figure inside it is your real, measured rate and you apply it as a margin, not a casual markup. Measure your overhead once, price every job to carry it, and “10 and 10” becomes a reference point instead of a slow leak.