What Your Overhead Costs — and What You Can Cut

Most contractors can tell you what a job cost. Far fewer can tell you what the business costs to exist for a month — and fewer still know whether that number is getting better or worse.

Overhead does not usually fail in one visible event. It drifts. A software seat here, an insurance renewal there, an admin hour that became a position. Each one is defensible on its own, and together they move the margin every job has to clear.

Overhead Is a Ratio, Not a Number

A dollar figure for overhead tells you almost nothing on its own. $480,000 is ruinous for a business doing $1.2 million and comfortable for one doing $4 million. The number that means something is overhead as a percentage of revenue, tracked over time.

Take annual overhead of $480,000 against $2,000,000 of revenue. That is a 24% overhead ratio — 24 cents of every dollar you bill goes to keeping the doors open before any job cost is paid.

One ratio is a data point. Twelve months of it is information. Pull the last three years and you will see one of three shapes: flat, which means overhead is scaling with the business; falling, which means you are getting operating leverage as you grow; or rising, which means overhead is outrunning revenue and every bid you write is quietly getting harder to win profitably.

A distinction worth keeping straight. This is not the same calculation as your break-even gross margin, even though both start with overhead. Break-even margin divides overhead by realistic annual capacity to tell you what a bid has to clear — that arithmetic is in when to turn down work that keeps you busy. The overhead ratio divides by actual revenue to tell you whether the cost of running the business is under control. The first is a pricing input. The second is a management metric. You need both, and they answer different questions.

The Split That Decides What You Can Actually Cut

Here is the part most overhead discussions skip. When revenue falls, you cannot cut overhead proportionally, because most of it does not move.

Sort every overhead line into two buckets:

• Fixed — costs that continue at roughly the same level whether you run four jobs or fourteen: shop or office rent, base insurance premiums, salaried administrative staff, software seats, loan and lease payments, your own compensation.
• Variable or semi-variable — costs that track activity: fuel, vehicle maintenance, temporary help, marketing spend, usage-tiered software, small tools and consumables not charged to jobs.

Now run the number that matters. Say that $480,000 of overhead is $360,000 fixed and $120,000 variable — a 75/25 split, which is not unusual for a contractor carrying a shop and an office.

Revenue drops 20%, from $2,000,000 to $1,600,000. Variable overhead falls with it, to roughly $96,000. Fixed overhead does not move. Total overhead is now $456,000 against $1,600,000 of revenue — an overhead ratio of 28.5%.

The ratio rose 4.5 points without a single decision being made. Every bid now has to clear a materially higher margin just to stand still, in exactly the quarter when winning work is hardest. That is the mechanism behind a slow year turning into a bad one.

Knowing your fixed share in advance is what makes the response possible. At 75% fixed, cutting your way through a downturn is not available — the lever is protecting margin and holding volume. At 40% fixed, you have real room to shrink the cost base. Most contractors have never calculated which position they are in.

Where Contractor Overhead Actually Drifts

Overhead rarely grows through a large decision. It grows through small recurring ones that nobody revisits:

• Software and subscriptions — seats for people who left, tools bought for one job, overlapping products doing the same thing.
• Insurance renewals accepted without review — premiums adjust annually, and general liability and vehicle coverage move with payroll and fleet size whether or not you re-shop them.
• Administrative hours that became a role — often correct, but worth naming as a decision rather than discovering it in the P&L.
• Vehicle costs never charged to jobs — a truck that serves one crew is arguably direct cost; if nothing allocates it, it sits in overhead and inflates the ratio for every job.
• Personal costs run through the business — beyond the tax exposure, commingling distorts the ratio badly enough that you cannot trust it as a management number. Clean separation is what makes the rest of this measurable.

The test for each line is not "can we afford it." It is "does this still support the business at its current size and direction." A cost that was right at $1.2 million of revenue is not automatically right at $2 million, and the reverse is also true.

Some Overhead Is Not Currently Deductible

One point worth knowing before you treat every indirect cost as a current-year expense. Under IRC §460, contractors reporting long-term contracts on the percentage-of-completion method must allocate certain indirect costs to those contracts rather than deducting them as incurred.

Most Florida contractors are outside that regime, because §460(e)(1)(B) exempts a construction contract expected at signing to be completed within 2 years where the contractor also meets the §448(c) gross receipts test — average annual gross receipts over the prior three years not exceeding $32,000,000 for tax years beginning in 2026 (Rev. Proc. 2025-32, §3.30).

Worth confirming your position rather than assuming it, particularly if your contracts are lengthening. The method question is covered in cash vs. accrual accounting for contractors.

Two Numbers for the Monthly Review

Overhead reviewed once a year is overhead you find out about eleven months late. Two numbers are enough to catch drift early, and both belong in an existing monthly financial review:

1. Overhead ratio this month and rolling twelve months. The rolling figure is the one to watch — a single month is noise.
2. Fixed overhead as a share of total. Recalculate when anything structural changes: a lease, a hire, a vehicle, a policy renewal.

For this to work at all, your P&L has to separate overhead from job costs cleanly. If administrative wages sit in the same account as field labor, neither number means anything — which is the practical argument for bookkeeping that informs decisions rather than just closing the year.

How KDM Accounting Services Can Help

We help Florida contractors get overhead into a form they can actually manage:

• Restructuring the P&L so overhead separates cleanly from job cost
• Calculating the overhead ratio and tracking it as a trend, not a snapshot
• Splitting fixed from variable so you know what is genuinely cuttable
• Testing what a revenue drop would do to your break-even margin before it happens
• Building both numbers into a monthly routine you will keep

Start With Twelve Months of P&Ls

Pull the last twelve months. Total the overhead, divide by revenue for the same period, and write the percentage down. Then go line by line and mark each one fixed or variable, and total the fixed share.

Two numbers, one afternoon. If the ratio is trending up, or the fixed share is higher than you expected, you have found the thing that will decide how the next slow quarter goes.

If you would like help getting clear visibility into overhead and what it is doing to your margins, contact KDM Accounting Services.