Overhead

Every business has two types of costs: those tied directly to making or delivering something, and those that exist regardless of how much work is on. The second category is overhead. Understanding your overhead - what it includes, how it behaves, and how to recover it through pricing - is one of the most important disciplines in running a profitable business.

Overhead costs do not appear on a job estimate as a line item. They sit behind every job you do, and if you do not consciously build them into your pricing, they erode the margin that looks healthy on paper.

Types of Overhead Cost

Overhead falls into three categories based on how it responds to business activity.

Fixed overhead stays constant regardless of how much or how little work you do. Rent is the clearest example. You pay the same amount whether you complete ten jobs this month or two. Other fixed overhead items include business insurance, management salaries, and software subscriptions.

Variable overhead rises and falls with business activity, though not in direct proportion to any single job. Examples include utilities - higher energy consumption when the workshop or office is busier - vehicle running costs not allocated to specific jobs, and consumable supplies.

Semi-variable overhead has a fixed base cost with a variable component on top. A mobile phone plan with a line rental plus usage charges is a typical example. So is a leased vehicle with a fixed monthly payment and variable fuel costs.

Overhead Rate and Pricing

The overhead rate expresses what proportion of revenue you need to generate simply to cover indirect costs, before profit. The formula is straightforward:

Overhead rate (%) = (Total overhead / Total revenue) x 100

For example, if a business runs £8,000 per month in overhead and generates £40,000 in monthly revenue, its overhead rate is 20%. That means 20 pence of every pound earned is already spoken for before direct costs or profit are considered.

This matters for pricing. If you price jobs to cover only labour and materials plus a margin, and you never account for overhead, you are effectively subsidizing every job from your profit. On low-margin work, that arithmetic destroys profitability quickly.

Overhead recovery is a related concept - specifically the discipline of ensuring that the overhead rate built into job pricing is actually achieved across the full portfolio of work. If you win jobs at prices that do not cover overhead, no amount of volume makes up the shortfall.

Zigaflow's Jobs module tracks direct costs against each job in real time, giving you the data to check whether individual jobs are covering their share of overhead alongside direct costs and margin.