Overhead is the cost of being in business that no single job pays for: vehicles, insurance, tools, software, advertising, and the hours you spend estimating and running the company. If your prices don't recover it, your 'profit' is really just unfunded overhead.
The simplest approach: total your annual overhead, divide by your realistic billable hours (or by your expected revenue), and build that recovery into your rate or markup. A shop with $120,000 of annual overhead and 3,000 billable field hours needs roughly $40/hour of overhead recovery baked in before any profit.
Recompute it at least yearly. Overhead creeps — a new truck, higher insurance, another subscription — and a rate set two years ago is quietly underwater.
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FAQ
Either works as long as it's recovered. Many contractors bake overhead into their hourly rate and markup rather than showing it separately. The point is that it's in the price, not absorbed.
Job cost is traceable to a specific job (its materials, its labor, its subs). Overhead is everything else that keeps the doors open. Keeping them separate is what lets you price accurately.