Construction Overhead and Profit: How to Calculate O&P (2026)

Overhead and profit (O&P) is often quoted as "10 and 10" — 10% overhead plus 10% profit — but most small U.S. contractors carry 20% to 30% overhead, so 10% badly underprices them. Overhead and profit are two different things, and confusing them is why a "busy" contractor can still end the year with nothing in the bank.

Here is how to calculate each one from your own numbers.

Overhead vs. profit: not the same

Overhead is the cost of being in business whether or not you have a job today: office rent, truck payments, insurance, software, admin salary, phone, marketing. It must be recovered on every job.

Profit is what the business keeps after every cost, including overhead, is paid. It is not your salary — your field labor or management pay is a cost, and profit is the reward on top.

Step 1 — Find your real overhead rate

Overhead rate = Annual overhead costs ÷ Annual revenue

Example: a contractor with $120,000 of annual overhead and $600,000 of revenue has a 20% overhead rate. Every job must carry 20% just to keep the doors open — before a dollar of profit.

Step 2 — Add profit on top

Profit is applied after overhead. If your overhead is 20% and you want a 10% profit, you are not adding 30% — you are stacking them:

Price = Job cost × (1 + Overhead rate) × (1 + Profit rate)

Worked example

A job has $20,000 of direct cost (labor + materials + subs). Overhead rate 20%, target profit 10%:

Add overhead: $20,000 × 1.20 = $24,000

Add profit: $24,000 × 1.10 = $26,400

So your price is $26,400, of which $2,400 is true profit. Note that this is a 32% total markup on cost — far above the "10 and 10" that many contractors mistakenly quote.

The "10 and 10" trap

"10 and 10" comes from large commercial and insurance work, where high volume spreads overhead thin. A small contractor doing $400k–$800k a year almost never has only 10% overhead — real overhead is usually 20%–30%. Quoting 10% overhead means you are paying part of your own overhead out of your profit, every single job.

Frequently Asked Questions

What is overhead and profit (O&P) in construction?

Overhead is the ongoing cost of running the business (office, insurance, trucks, software, admin) that must be recovered on every job. Profit is what the company keeps after all costs, including overhead, are paid. O&P is the two added on top of direct job cost.

What is a typical overhead percentage for a contractor?

Most small to mid-size U.S. contractors carry 20% to 30% overhead. The "10%" figure comes from high-volume commercial and insurance work and underprices a typical residential contractor.

How do I calculate my overhead rate?

Divide your total annual overhead costs by your total annual revenue. For example, $120,000 of overhead on $600,000 of revenue is a 20% overhead rate that every job must recover.

Is the '10 and 10' rule enough?

Usually not for small contractors. 10% overhead assumes high volume; if your real overhead is 25%, quoting 10% means the missing 15% comes straight out of your profit on every job.

Is profit the same as my salary?

No. If you work in the field or manage jobs, your pay is a labor or overhead cost. Profit is the return the business earns above every cost, including your pay.

Related Guides

What Markup Should a Contractor Charge? Markup vs. Margin

How Much Should a Contractor Charge Per Hour?

How to Price a Construction Job: The Contractor Pricing Formula