Overheads and profit in construction pricing.
A price that covers only direct costs and site preliminaries is not sustainable. Every construction business must recover its head office overheads and earn a profit. Understanding how these layers work is essential to pricing that keeps you in business.
Authored by Alexandr Vreme & Maksym Vasylkov
Published — Next review
What are head office overheads?
Office overheads (sometimes called fixed overheads or general overheads) are the costs of running the business that exist whether or not there is a single contract on site. They are not assignable to any specific project.
Common office overheads include:
- Office rent, rates, and utilities
- Directors' and administrative salaries
- Business insurance (employers' liability, public liability, professional indemnity)
- Vehicle fleet costs for non-site vehicles
- IT systems, software licences, and telecommunications
- Marketing, website, and business development
- Professional fees (accountancy, legal, health and safety consultancy)
- Training and continuing professional development
Overhead recovery methods
The most common method is to apply a percentage on cost. A contractor calculates annual office overheads (£120,000) divided by anticipated turnover (£1,000,000) to arrive at a recovery rate of 12%. That percentage is then added to the estimated cost of each job.
An alternative approach is to recover overheads as a lump sum within the preliminaries section. This gives transparency on larger projects where the client expects to see management and set-up costs itemised. For smaller works, the percentage method is simpler and more widely used.
Gross margin vs net margin
These two terms are frequently confused. Understanding the difference is critical.
| Concept | Definition | Example |
|---|---|---|
| Gross margin | The difference between selling price and direct project costs (including preliminaries) before office overheads | Price £61k − job cost £50k = £11k gross margin (18%) |
| Net margin | The profit after deducting both direct costs AND office overheads | Gross £11k − overheads £6k = £5k net profit (8.2%) |
Typical margin ranges
Industry benchmarks vary by sector and contract size, but the following ranges reflect common UK practice for small and medium-sized contractors:
- Gross margin target: 20–30% for smaller builders, 10–18% for main contractors on larger projects
- Office overheads: typically 8–15% of turnover depending on fixed cost base and efficiency
- Net profit: 5–12% before tax; anything below 5% leaves little room for error or reinvestment
Miniature worked example
A contractor prices a two-storey side extension. The build-up looks like this:
| Element | Amount |
|---|---|
| Direct costs (labour, materials, plant, subcontractors) | £38,000 |
| Site preliminaries (supervision, welfare, scaffolding) | £12,000 |
| Total job cost | £50,000 |
| Add office overheads @ 12% | £6,000 |
| Add net profit @ 10% | £5,000 |
| Selling price (excluding VAT) | £61,000 |
The race-to-the-bottom trap
When work is scarce, the temptation is to cut overhead recovery or reduce profit margin to win the tender. A few percentage points shaved off the mark-up might seem harmless, but on a £200,000 contract, reducing net profit from 8% to 4% loses £8,000 — and that is the very margin that funds business investment, replaces worn plant, and covers unexpected losses elsewhere.
Sustainable pricing means knowing your true overhead cost, applying it consistently, and competing on efficiency and quality rather than on margin erosion. A competitor pricing at zero overhead recovery is not a benchmark — they are either unaware of their true costs or heading for trouble.
Questions to ask
- Is my overhead recovery percentage based on recent actual costs, or is it a figure I have not reviewed in years?
- When did I last recalculate my overhead rate against actual turnover?
- Do my prices distinguish between gross margin and net margin, or am I conflating the two?
- If turnover drops, will my overhead recovery rate still cover fixed costs?
- Am I paying myself a sustainable profit, or just a disguised salary?
Related guides and tools
Understand the direct vs indirect cost split that underpins every margin calculation. Avoid common pitfalls with our guide to estimating mistakes that destroy margin. Use the Quotation Generator to issue priced quotes with clear terms.