What Your Overhead Really Costs Per Hour (And Why Your Rate Is Probably Too Low)

The gap between your rate and your income

A contractor billing $85 an hour should be making good money. But after taxes, insurance, tools, vehicle costs, and the hours spent on unbillable work, the effective take-home often tells a different story.

The reason is almost always the same: the rate was set without accounting for the full cost of running the business. Every dollar of overhead that isn't built into your rate is a dollar that comes out of your income.

The overhead calculation is the foundation of sustainable pricing. It takes about 30 minutes to do properly and changes how you think about every estimate you write.

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The two types of cost

Direct costs are tied to specific jobs: materials, subcontractor fees, any supplies consumed by the work. These vary by job and should be estimated separately for each quote.

Overhead costs are the fixed and semi-fixed costs of running the business, regardless of how much work you do. These need to be recovered through your labour rate.

The overhead list for a solo contractor typically includes:

Write out every line item for your business. Total them annually.

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The calculation

Step 1: Annual overhead total Add up every overhead cost for the year. Include the unbillable time — if you spend 10 hours per week on estimates, follow-up, admin, and driving, that's ~500 hours per year that must be funded by your billable hours.

Step 2: Billable hours Estimate your actual billable hours per year. A full-time solo contractor typically bills 1,200–1,600 hours per year (not the theoretical 2,080). The gap is overhead time, vacation, sick days, and slow periods.

Step 3: Overhead per billable hour Annual overhead ÷ billable hours = overhead burden per billable hour.

If your annual overhead is $42,000 and you bill 1,400 hours: $42,000 ÷ 1,400 = $30 overhead per billable hour

Step 4: Add your target income If you want to take home $80,000 per year, that's $80,000 ÷ 1,400 = $57/hour in labour income.

Step 5: Your break-even rate $30 (overhead) + $57 (income target) = $87/hour break-even labour rate

This is before any profit margin. To build a business that can weather slow periods, equipment failures, or a slow month, add 15–20% on top:

$87 × 1.20 = ~$104/hour minimum viable rate

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What this reveals

For many contractors running this calculation for the first time, the number is higher than their current rate. Sometimes significantly higher.

This doesn't mean you're in trouble — it means you now have accurate information. The path forward is either raising your rate toward the break-even number, reducing your overhead costs, or both.

As covered in how to raise your prices without losing customers, rate increases don't have to be sudden or dramatic. Graduated increases, starting with new customer quotes, move you toward the right number without disrupting existing relationships.

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The hourly rate vs. job pricing debate

Some contractors prefer to price jobs rather than quote hours — a fence installation is $X, a bathroom renovation is $Y, regardless of exact hours. This works well once you have enough job history to price accurately from experience.

The overhead calculation is still necessary in this model — it just gets applied differently. Your minimum job price for any given scope should cover direct costs, overhead allocation, and target profit. The overhead-per-hour number gives you the floor.

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Quarterly review

Overhead costs change. Vehicle payments end. Insurance premiums increase. Your billable hours fluctuate. Review the calculation quarterly, adjust your rates accordingly, and make sure every estimate you send is pricing toward real profit — not just covering costs and hoping something's left over.

For handyman and small-job contractors specifically, the detailed breakdown in handyman pricing 101 shows how this overhead calculation applies to shorter, higher-turnover jobs.