Overhead Recovery: Are You Charging Enough?

Why this matters

A lot of shops set their billing rate by copying the company down the street, then wonder why they are busy all year and broke in December. The reason is almost always overhead recovery. If your price covers the part and the tech's wage but nothing else, every job quietly loses money on the costs you forgot to charge for. This is the single most common pricing mistake in the trades, and it is fixable with arithmetic, not luck.

What overhead actually is

Overhead is every cost that does not belong to a specific job. The wage you pay a tech while they turn a wrench is a direct cost, it attaches to that job. But the rent on your shop, the insurance, the truck payments, the phone, the software, the office person answering calls, the fuel between stops, your own salary as owner: none of that attaches to one job. It still has to get paid, so it has to be spread across all the jobs you do.

Two buckets to keep straight:

• Direct cost (job cost): materials, the tech's wage and burden for hours on that job, permit fees, subcontractor cost. Goes up and down with the job.
• Overhead (fixed cost): rent, insurance, admin pay, vehicle costs, tools, marketing, owner pay. Stays roughly the same whether you ran 10 jobs or 30 this week.

If you are not deliberately loading overhead into your price, you are donating it.

The billable-hour reality

Here is the trap that sinks most labor-rate math. A tech you pay for a 40-hour week does not sell 40 billable hours. Drive time, restocking, callbacks, training, slow days, and paperwork eat a big slice. A realistic billable ratio is often around 60 to 70 percent of paid hours, sometimes lower.

That matters because all your overhead has to be recovered across only the billable hours, not the paid hours. If you spread overhead across 40 hours but only sell 26, you under-recover by the difference and eat the gap every single week.

How to size your true rate

Work it as a rate, no dollar figures needed to understand the shape:

1. Total your monthly overhead (everything in the fixed bucket, including a real owner salary).
2. Count your billable tech hours per month (paid hours times your honest billable ratio).
3. Divide overhead by billable hours. That is your overhead per billable hour - the amount each sold hour must carry just to keep the lights on.
4. Add the tech's fully burdened wage (wage plus payroll taxes, workers comp, benefits) per hour.
5. Add your target profit margin on top of all of it.

The sum is your floor rate. Anything below it loses money no matter how busy you are.

Reading the signal

Once you know your overhead per billable hour, a few things click into place:

• Slow season is dangerous because billable hours drop while overhead stays flat. Your recovery per hour has to be high enough in busy months to cover the lean ones.
• Adding a truck adds overhead immediately but billable hours only ramp up over weeks. Price for the new fixed cost before it shows up.
• Discounting "just labor" is worse than it looks. Knocking a chunk off the rate often wipes out the entire overhead-plus-profit layer and leaves you working for wages with none left over.

What to do with the number

Compare your floor rate to what you actually charge. If your billed rate sits below the floor, you have three levers: raise the rate, raise the billable ratio (cut drive time, tighten scheduling, reduce callbacks), or cut overhead. Most shops need a mix. The point is that "are we charging enough" stops being a feeling and becomes a measurement you can act on.

References

• U.S. Small Business Administration: guidance on pricing, cost structure, and break-even analysis.
• IRS guidance on business expense categories (direct vs indirect costs).
• Trade-standard practice on burdened labor rate and billable-hour utilization.
• See related: Markup vs Margin, The Mistake That Kills Profit.