The fee our building contractor charges for his work includes a percentage to cover overhead and profit. What is overhead, and is this legitimate?
Overhead is the operational expense of running a business that is not directly attributable to your specific project. This would include utilities, rent, insurance, taxes, bookkeeper, truck payments, and the like. All these expenses must be paid just to stay in business. According to industry expert Steve Maltzman of Builder Accounting Services in Redlands, California, who authored a national study for the National Association of Home Builders, the average overhead for construction companies, is 21% of revenue. After the labor, material and overhead expenses are paid, the rest is profit. Profit is the money available to invest back into the business, share with employees, and be taxed on. If your contractor doesn’t make any, he won’t be in business to finish your job, take care of warranty issues, or build your next project. It sounds like your contractor works on a Time and Material basis, where he is reimbursed for his direct expenses such as labor, subcontracts and materials for you
