Your Profits and Your Cash Flow – The Overhead Connection

“Overhead schmoverhead! Who cares?”

Your profits care. 

Your cash flow cares.

And if you want to stay in business long-term, you should too.

Most contractors understand what profit is and why cash flow matters. However, the critical junction of the two often gets overlooked: your overhead and how you allocate it when pricing jobs.

Overhead isn’t just a number your accounting professional tracks. It’s a real cash eater if it’s not adequately accounted for—and it directly affects whether your jobs are profitable and whether you have enough cash to operate.

When you price without overhead in mind, you might think you're making a profit—but you’re digging into your own pocket just to keep the lights on.

Direct Costs, Indirect Costs, and Overhead – Know the Difference

Understanding what belongs where is the first step in pricing correctly.

Direct Costs: Costs that can be explicitly traced and are exclusively to a job. Examples include jobsite labor (field crew), materials, subcontractors, and equipment rental used on one job.

Indirect Costs: Costs related to completing the work but not tied to one specific job. These are job-related but benefit multiple projects. They include items such as small tools, safety supplies, fuel, field supervision, and general liability insurance. 

Overhead Costs: Costs required to run the business, whether or not you have jobs. These are not job-site specific. This category includes expenses such as office rent, administrative salaries, software subscriptions, utilities, marketing, and professional fees.

Many contractors lump indirect costs into overhead—leading to underpriced jobs.

Indirect costs should be recovered at the job level before overhead is allocated.

The Overhead Connection to Profits

Profit isn't just what’s left after you subtract materials and labor. Real profit only exists after covering direct, indirect, overhead, and contingency costs.

If you don't include these layers in your job pricing, it’s not accurate profit—it's wishful thinking.

Pro Tip: A job that shows a “profit” on paper may not be profitable in real life if overhead hasn’t been factored into your estimate.

The Overhead Connection to Cash Flow

Cash flow problems don’t usually stem from a lack of work, but rather from underpricing work.

When you omit indirects and overhead in your bids, the cash you need to pay those ongoing expenses must come from somewhere – usually your next deposit, your line of credit, or your own pocket.

Pro Tip: Pricing with full cost recovery in mind creates consistent, predictable cash flow – without scrambling between pay cycles.

Why Many Contractors Underprice Their Jobs

Here are the top three reasons we see overhead get ignored or underestimated:

• Pressure to win bids – contractors leave out overhead or slash markup to be “competitive.”

• Lack of data – usually because they don’t have systems in place to collect, analyze, and utilize data effectively

• Misclassification of costs – indirect costs, such as fuel, small tools, and insurance, are not accurately captured and often end up being blended into overhead or are lost entirely. This is usually due to a lack of understanding of how to allocate expenses correctly. (Sometimes brought on by those who are inexperienced in construction-specific accounting practices.)

A Simple Overhead Allocation Strategy You Can Start Using Right Away

Here’s the overhead model we use with clients:

Step 1: Get Accurate Direct Costs

Ensure your estimate includes all direct costs, including the actual labor burden (wages + payroll taxes + workers comp + benefits).

Step 2: Capture Indirect Costs

Identify which costs benefit multiple jobs (fuel, field supervision, small tools, indirect insurance). Add a flat dollar amount or percentage to every job to recover these costs.

Step 3: Calculate Your Overhead Percentage

• Pull your Profit & Loss Statement for the last 12 months.

• Add up your total overhead costs (administrative, non-job costs).

• Divide that number by your total revenue to get your average overhead %.

• Example:

  • Annual overhead: $500,000

  • Annual revenue: $2,500,000

  • Overhead percentage: 500,000 ÷ 2,500,000 = 20%

Step 4: Apply the Formula to Every Job

When pricing your work, build your estimate in this order:

• Direct Costs

• Indirect Costs

• Overhead Recovery (based on your overhead percentage)

• Profit

• Contingency (optional but recommended)

This ensures you’re not just covering your costs, but building a healthy financial engine that produces profit AND protects cash flow.

Bottom Line

You don’t accidentally become profitable or cash flow positive.

You build it into your estimates – on purpose.

By understanding the true nature of direct, indirect, and overhead costs, you can:

• Bid with confidence

• Maintain positive cash flow

• Grow your business sustainably

• Stop funding your overhead out of your profits

Ready to see what your real overhead percentage is?

Most contractors are shocked when we calculate it for the first time. If you’d like help determining your exact number and building it into your estimates, we’re here to help.

Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:

• Clients and customers

• Employees and subcontractors

• Vendors and service providers

• Governmental entities 

Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:

• Remain informed

• Avoid hassles

• Reduce risks

• Be future-ready

Ready for action? Or want to know more? Get in touch today to schedule a complimentary discovery call. 866-629-7735