Overhead and profit, in plain numbers

A job price must recover direct job costs, a share of business overhead and profit. Adding an arbitrary percentage to materials and labor may leave overhead unpaid. Calculate your own overhead allocation first, then add the profit margin you need. The illustrative deck below shows the difference.

The job: a 320-square-foot deck rebuild

Tear out an existing wood deck, rebuild on new footings with composite decking and railing. Two carpenters, five days.

Burdened labor is the wage plus payroll taxes, workers' comp, and any benefits. If you are costing at the raw hourly wage, every number after this one is already low.

These are plausible numbers for one job in one market, not benchmarks. Materials, permit fees, rental rates and the burden on a wage all move by region and trade. Substitute your own.

Example: why a 20 percent markup falls short

Add 20 percent. That is $13,008, and you round it to $13,000. The estimate goes out, the customer signs, and you expect to keep around $2,160.

The "10 and 10" version lands in the same place. Applied the usual way — 10 percent overhead and 10 percent profit, both on the same base — that is 20 percent, so the same $13,008. Compound it instead, 10 percent and then 10 percent again, and you get $13,116. Either way it feels like a real markup.

Direct cost, overhead and profit are three different things

Direct cost is anything you can point at a specific job — the materials, the crew hours, that dumpster, that permit.

Overhead is what the business spends whether or not that deck exists: the shop, the insurance, the trucks between jobs, the estimating hours, the callback you did for free in March.

Profit is what remains after both are paid — the return for carrying the risk, on top of paying everyone who worked, including you. That last part gets skipped. If your field hours are not in direct labor and your office time is not in overhead, what you call profit is really your unpaid wage, and you will keep undercharging.

This is a costing distinction. For a sole proprietor, payments to yourself are not deductible wages; IRS Publication 334 explains that treatment. You still need to value your own labor when deciding whether a price pays enough.

Work out your own overhead rate from last year

Pull last year's profit-and-loss statement and sort every line into "job" or "business". A small remodeler with an owner and two carpenters might land here:

That first line is the one you cannot copy off the statement. A sole proprietor or single-member LLC has no owner's-pay line to sort, for the reason above — you decide what your non-field time is worth and add it by hand. An S-corp owner on a W-2 salary will find it there; only the non-field share belongs here.

Now divide by last year's total direct job costs — say $430,000:

$123,400 / $430,000 = 0.287 -> 29% overhead rate

That rate assumes you do the same volume again. Drop to $300,000 of direct cost and the same $123,400 needs a 41 percent rate. Recheck it whenever volume or fixed costs move.

A percentage of direct cost allocates more overhead to jobs with higher direct-cost dollars. That may not match the estimating and supervision time each job needs: an expensive material can raise the allocation without adding management hours. An allocation per field labor hour follows a different pattern. Choose a consistent method with your accountant and check that it recovers annual overhead without counting costs twice.

Example: price the deck with overhead and profit included

Direct cost                    $10,840
+ Overhead at 29%               $3,144
= Break-even                   $13,984

Then add profit. Watch markup against margin: 10 percent added to $13,984 gives $15,382, which is only 9.1 percent of the price. To keep a true 10 percent of what the customer pays, divide instead:

$13,984 / 0.90 = $15,538 -> price it at $15,540

The gap is $2,540. The $13,000 estimate never reaches break-even: it is $984 short of this job's share of overhead. It still puts $2,160 toward the office, so one job like that will not sink you. Price a year of them that way and the shortfall is the year's loss, found when the books close.

"10 and 10" is a convention, not a rule

If a customer, insurer or contract asks for "10 and 10," establish the calculation base and whether the two percentages are added or compounded. The label does not establish whether your overhead is covered.

A contract may also cap reimbursable markup on changes or time-and-materials work. Read that clause when bidding: a reimbursement ceiling is not a method for calculating your costs.

What makes 10 percent survivable is a large direct-cost base, mostly subcontracts, spreading a modest office over a lot of dollars. A two-truck remodeler carries a similar office over a fraction of that volume. The question is not whether 10 and 10 is standard. It is whether 10 percent covers your $123,400.

Insurance and bonding sit heavier on some trades

Workers' compensation premiums depend on your actual work classifications, payroll and coverage. Put job-related payroll costs into burdened labor. Allocate general business insurance and license-bond costs to overhead, but charge a project-specific payment or performance bond to that project where appropriate. Your carrier and surety agent can identify the costs; do not count them twice.

That is the real reason a borrowed markup fails: overhead is specific to one business.

Save calculated selling prices for quotes

Calculate the selling prices outside DoneQuote, then save them in the service catalog with the markup already included. An AI draft can use that catalog to price the requested work. Review the selected services, quantities and assumptions before sending; a saved price does not establish the job's final cost or profitability.

Summary

• Direct cost is job-specific; overhead is what the business spends regardless
• Overhead rate = annual overhead / annual direct job costs, redone when volume moves
• Profit sits on top of break-even, after the owner's labor is paid
• Divide by (1 − margin) to keep a real percentage of the price
• Treat 10 and 10 as someone else's arithmetic until you check your own