How To Calculate Overhead Costs In Construction Projects

How to Calculate Overhead Costs in Construction Projects

Introduction

Welcome everybody to this blog that’s going to talk about overhead costs in construction projects. I’m going to break it down in simple “construction speak,” in a way I wish someone had explained to me when I was just starting out.

If you’re an estimator, a controller, a project manager, or a project executive, this blog will give you a mindset shift that helps you clearly understand overhead and its impact on your project’s financial health.

The 6-2-4 Concept

Let me start with a story. I once worked for a general contractor where we used the term 6-2-4:

• 6% gross profit was required on every project.
• 2% typically went to general and administrative costs (your overhead).
• That left 4% net profit – what the company truly kept as profit.

This simple ratio helped us think about budgets and profitability clearly.

Understanding the Key Buckets

Construction finances often come down to different “buckets” of costs and gains. Let’s define a few:

• General Conditions (GCs): Primarily your staff. Sometimes insurance is included. These costs are often billed to the project, and the company may even gain from the difference between billed rates and actual compensation (called labor gains).
• General Requirements (GRs): Trailers, fencing, restrooms, indirect but essential items that don’t add direct value but are needed to build.
• Gross Profit: Revenue minus direct job costs. This includes fee, labor gains, equipment rental gains, insurance gains, shared savings, and more.
• Overhead (G&A): The costs of running the company at large, corporate expenses, support departments, software, safety, etc.

When you subtract overhead from gross profit, you get net profit, the real bottom line.

The Common Problem: Cutting Too Deep

One of the most common issues in construction is executives or project teams cutting overhead, GCs, or GRs too aggressively.

For example, maybe you want to budget for extra BIM modeling or hire lean scheduling consultants in preconstruction. Someone may scratch those items out to “save costs.” But when those resources are missing, mistakes and inefficiencies pile up later, eating into contingency and eroding your fee.

Guideline: Fund the resources you need to build right the first time. Not too much, not too little. Cutting too deep upfront almost always costs more in the end.

Strategy in Action

To manage overhead and profit well, you need visibility. That means looking beyond just the gross profit number. You need a fully visible financial projection sheet that includes:

• Contingencies (owner and contractor).
• Buyout savings.
• Shared savings.
• Gains (labor, insurance, bonds, equipment, etc.)
• Overhead charges from corporate.
• Net profit targets.

When you see all the moving parts, you can strategize ethically and effectively. For example, I once noticed all jobsite cleanup was coded incorrectly under self-perform work. By correcting the coding, we balanced costs more accurately and protected profit, all within the rules.

Best Advice

Know your numbers. Understand how overhead, general conditions, general requirements, and corporate costs all connect to your project’s profitability.

The key is balance:

• Don’t overload your projects with unnecessary overhead.
• Don’t cut resources so lean that you create inefficiencies and erosion later.

Overhead is part of building well, manage it wisely.