How do you calculate the overhead percentage?

Divide your overheads for a period by your sales for the same period, without GST or VAT, and multiply by 100. $176,000 of overheads against $640,000 of sales is 27.5%: every $100 of sales carries $27.50 of overheads before the materials and labour in the job.

How do you calculate an overhead rate per hour?

Divide your overheads for a period by the hours you charged customers for in the same period. $176,000 of overheads over 4,200 billable hours is $41.90 an hour, which every hour you quote has to recover on top of its own wages and materials. Use billable hours, not hours paid: travel, quoting and admin time do not bring in money.

What counts as overheads?

The costs of running the business that do not rise with each job: rent, vehicle leases and running costs, insurance, software, phones, accounting, office and admin wages, advertising, bank fees, depreciation and interest. Materials, stock, subcontractors and the wages of people doing the billable work are direct costs, not overheads. In Xero, overheads are the Operating Expenses section of the Profit and Loss, below Gross Profit.

What is a good overhead percentage?

There is no single good figure: a consultancy with no stock can carry a much higher overhead percentage than a builder who passes most of the price on to suppliers. The better test is overheads against gross profit. If overheads take all of it, the business makes a loss however busy it is; what is left after overheads is your net profit. Watch the trend too: overheads rising faster than sales is the usual reason margins shrink.

What is the difference between an overhead rate and a markup?

An overhead rate tells you how much of your running costs each hour or job has to carry. A markup is what you add on top of cost when you price. A quote should cover direct costs, plus the overhead rate, plus profit; a markup chosen without knowing the overhead rate can leave a job at a loss. The margin and markup calculator converts between the two.

Should I include my own pay?

If you pay yourself a wage through the payroll, it is already in the Profit and Loss: count the share for admin and running the business as an overhead and the share for billable work as direct labour. If you take drawings instead, they are not on the Profit and Loss, so the net profit this calculator shows is what is left to pay you as well as tax.

Are my figures stored or sent anywhere?

No. The calculation runs in your browser. Nothing you type is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

Overhead rate calculator: overhead % and cost per hour

How the calculator works

Overhead percentage = overheads ÷ sales × 100, both for the same period and without GST or VAT.
Overhead rate per hour = overheads ÷ billable hours (the hours you charged customers for, not the hours you paid).
Overheads on a job = the job's hours × the overhead rate per hour.
Overheads on direct labour = overheads ÷ the wages and on-costs of the people doing billable work × 100. Job costing often adds overheads this way: $1 of wages on the job carries this much on top.
Share of gross profit = overheads ÷ (sales − cost of sales) × 100. What is left after overheads is net profit.

Not sure which costs are overheads? Overheads stay roughly the same whatever you sell; direct costs rise with each job. Fixed and variable costs sorts the usual lines into each.

A worked example

An Auckland plumbing business with three plumbers on the tools and one office manager, for the year to 31 March. Made-up figures to show the arithmetic, all without GST.

	$
Sales	640,000
Cost of sales: materials and subcontractors	195,000
Cost of sales: plumbers' wages and KiwiSaver	189,000
Gross profit	256,000
Overheads: vans, fuel, insurance, office manager, rent, software, accountant, phones, depreciation	176,000
Net profit	80,000

The three plumbers charged customers for 4,200 hours between them (about 1,400 each, after travel, quoting, call-backs and leave).

Overhead percentage: $176,000 ÷ $640,000 = 27.5%. Every $100 of sales carries $27.50 of overheads.
Overhead rate per hour: $176,000 ÷ 4,200 = $41.90 for every hour charged.
On a 6-hour job: 6 × $41.90 = $251.43 of overheads, on top of the plumber's wages and the parts. A quote that covers wages and parts but not this makes a loss.
On direct labour: $176,000 ÷ $189,000 = 93.1%, so each $1 of plumbers' wages carries about $0.93 of overheads.
Share of gross profit: $176,000 ÷ $256,000 = 68.8%, leaving $80,000 of net profit before tax.

If a plumber leaves and billable hours drop to 2,800, the same overheads cost $176,000 ÷ 2,800 = $62.86 an hour: about $21 more on every hour quoted. That is why fewer billable hours hurt more than the lost wages suggest. Press "Load the worked example" above to see it in the calculator.

Getting the figures from Xero

Go to Accounting › Reports › Profit and Loss and pick the last 12 months, so seasonal months and yearly bills like insurance even out.
Sales: Total Trading Income. If you are registered for GST or VAT, Xero already shows it without the tax.
Overheads: Total Operating Expenses. If a direct cost has been coded there (materials bought on the business card, say), move it out of your figure. How to read a Profit and Loss in Xero explains each section.
Cost of sales: Total Cost of Sales. Some businesses put the wages of people doing billable work here, others in Operating Expenses; for this calculator they belong in cost of sales, and in direct labour.
Billable hours: Xero's accounting reports do not hold hours. Take them from your job or timesheet app, or Xero Projects if you use it; profit by job in Xero covers the options.
To see which overhead lines grew, run the report with 12 periods by month; where is my money going shows how to find the line that moved most.

What to do with your overhead rate

Price with it. The charge-out rate calculator turns your pay, overheads and billable hours into the hourly rate you need, with profit on top.
Know the sales you need. The break-even calculator divides overheads by your gross margin to show the sales that cover them.
Check the markup. The margin and markup calculator shows whether your usual markup leaves enough margin to carry the overhead percentage.
Before adding an overhead, such as a new van or an office hire, divide its yearly cost by your billable hours to see what it adds to every hour. The can I afford to hire calculator does this for a new role.

If overheads take most of your gross profit, what is a good profit margin shows how to tell whether prices or overheads are the problem.

Questions

How do you calculate the overhead percentage?: Divide your overheads for a period by your sales for the same period, without GST or VAT, and multiply by 100. $176,000 of overheads against $640,000 of sales is 27.5%: every $100 of sales carries $27.50 of overheads before the materials and labour in the job.
How do you calculate an overhead rate per hour?: Divide your overheads for a period by the hours you charged customers for in the same period. $176,000 of overheads over 4,200 billable hours is $41.90 an hour, which every hour you quote has to recover on top of its own wages and materials. Use billable hours, not hours paid: travel, quoting and admin time do not bring in money.
What counts as overheads?: The costs of running the business that do not rise with each job: rent, vehicle leases and running costs, insurance, software, phones, accounting, office and admin wages, advertising, bank fees, depreciation and interest. Materials, stock, subcontractors and the wages of people doing the billable work are direct costs, not overheads. In Xero, overheads are the Operating Expenses section of the Profit and Loss, below Gross Profit.
What is a good overhead percentage?: There is no single good figure: a consultancy with no stock can carry a much higher overhead percentage than a builder who passes most of the price on to suppliers. The better test is overheads against gross profit. If overheads take all of it, the business makes a loss however busy it is; what is left after overheads is your net profit. Watch the trend too: overheads rising faster than sales is the usual reason margins shrink.
What is the difference between an overhead rate and a markup?: An overhead rate tells you how much of your running costs each hour or job has to carry. A markup is what you add on top of cost when you price. A quote should cover direct costs, plus the overhead rate, plus profit; a markup chosen without knowing the overhead rate can leave a job at a loss. The margin and markup calculator converts between the two.
Should I include my own pay?: If you pay yourself a wage through the payroll, it is already in the Profit and Loss: count the share for admin and running the business as an overhead and the share for billable work as direct labour. If you take drawings instead, they are not on the Profit and Loss, so the net profit this calculator shows is what is left to pay you as well as tax.
Are my figures stored or sent anywhere?: No. The calculation runs in your browser. Nothing you type is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

This calculator gives an estimate from the figures you enter. It is not financial advice. Xero is a trademark of Xero Limited. This tool and ReportPilot are independent and are not made or endorsed by Xero.

Overhead rate calculator: what do your overheads cost per hour and per job?

Your overhead rate