How Overheads Affect What You Need to Charge

Written for the UK tradesperson, but the principles apply in most English-speaking countries.

Overheads are the costs of running your business that don't belong to any one job. Insurance, tools, your phone, your accountant, advertising. None of them appear on a customer's quote, so they're easy to forget. But every one of them has to be paid, and the only money you have to pay them with comes from the jobs you do.

If your prices don't cover your overheads, they come out of your wages. This post shows you how to work out your overheads, how they turn into an amount per hour, and how changes in your overheads or your workload change what you need to charge.

What counts as an overhead

An overhead is any business cost you pay whether you're working or not, and that you can't charge directly to a single job. Common overheads include:

•       Public liability, tools and professional insurance

•       Replacing and repairing tools and equipment

•       Phone and broadband

•       Software, apps and subscriptions

•       Accountant and bookkeeping

•       Advertising, website and online listings

•       Trade memberships, scheme fees and certification

•       Training and qualifications

•       Workwear and PPE

•       Storage, workshop or office rent

•       Bank charges and card payment fees

•       Stationery, postage and small office costs

What isn't an overhead: materials, labourers, subcontractors, skip hire and anything else you can charge directly to a specific job. Those are job costs and go in the price for that job.

A note on van costs: your van is a real business cost, but decide where it goes and count it only once. If you charge travel on each job at a cost per mile, leave van running costs out of your overheads. If you don't charge travel separately, include the van in your overheads.

Step 1: Add up your yearly overheads

Go through your bank statements and receipts for the last 12 months and add up every overhead. Include things you pay once a year, such as insurance and memberships, and put money aside for occasional costs, such as replacing an expensive tool.

Here's an example for a sole trader:

•       Insurance: £600

•       Tools and equipment: £1,500

•       Phone and broadband: £600

•       Software and apps: £400

•       Accountant: £900

•       Advertising and website: £1,200

•       Trade memberships and certification: £700

•       Training: £500

•       Workwear and PPE: £400

•       Storage unit: £1,200

•       Bank charges and card fees: £300

•       Stationery and small costs: £200

•       Total: £8,500 a year

Most tradespeople who do this for the first time are surprised by the total. It's usually much more than they'd guessed.

Step 2: Turn your overheads into an hourly figure

Divide your yearly overheads by the number of hours you can actually charge to customers in a year, not the total hours you work.

Using 1,250 chargeable hours a year:

•       £8,500 ÷ 1,250 hours = £6.80 an hour

That means every hour you charge has to include £6.80 just to pay the business's running costs, before you've paid yourself anything or made a profit.

If you're not sure how many hours you can really charge, or how your overheads fit into your full rate, read why your hourly rate is not the same as your wage.

Step 3: Build overheads into your rate

Your hourly rate has three parts: what you pay yourself, your overheads and your profit. Using the same example:

•       Your own labour: £27.20 an hour

•       Overheads: £6.80 an hour

•       Break-even rate: £34.00 an hour

•       Add 20% for profit: £40.80 an hour

Charge less than £34.00 and every hour you work costs you money. Leaving overheads out of your rate is one of the 20 common pricing mistakes tradespeople make and it's one of the most expensive.

How rising overheads change your rate

Using 1,250 chargeable hours, there's a simple rule of thumb: every £1,250 you add to your yearly overheads adds £1 an hour to your break-even rate.

Suppose your overheads rise from £8,500 to £11,000, because you take on a bigger storage unit and a new software subscription:

•       Overheads per hour: £11,000 ÷ 1,250 = £8.80

•       Break-even rate: £27.20 + £8.80 = £36.00

•       With 20% profit: £43.20 an hour

If you keep charging £40.80, the extra £2,500 comes straight out of your profit and wages. Every time your overheads go up, your rate has to go up with them.

What happens when you're less busy

Your overheads don't go down when work is quiet. Your insurance, phone, accountant and storage unit cost the same whether you're working full weeks or not.

Suppose a slow year means you only charge 1,000 hours instead of 1,250:

•       Overheads recovered at £6.80 an hour: 1,000 × £6.80 = £6,800

•       Actual overheads: £8,500

•       Shortfall: £1,700, paid out of your own pocket

To cover the same overheads over 1,000 hours, you'd need £8.50 an hour for overheads, not £6.80. This is why it's important to base your rate on a realistic number of chargeable hours, not an optimistic one. If you assume you'll be busy every week, a quiet spell will cost you money.

Growing your business means growing your overheads

Taking on a workshop, a second van, an office or an employee can be the right move, but each one adds to your overheads, sometimes by thousands of pounds a year. Before you commit, work out the new yearly total and what it means for your hourly rate. Then check whether you'll have enough extra chargeable hours, or can charge enough more per hour, to pay for it.

Should you cut your overheads instead?

Reducing overheads is the other way to lower the amount you need to charge. Using the same rule of thumb, every £1,250 you cut from your yearly overheads is worth £1 an hour.

Look for subscriptions you no longer use, insurance you can get cheaper by shopping around, and costs that have crept up without you noticing. But be careful what you cut. Advertising that brings in work, training that lets you charge more, and proper insurance are usually worth every penny. Cutting them to lower your rate can cost you far more than it saves.

Review your overheads every year

Add up your overheads at least once a year, and again whenever something significant changes: a new van, a new premises, a big insurance increase. Update your hourly rate each time. If you don't, your rate gradually falls behind your costs, and your profit shrinks without you noticing.

You can see the effect of overheads on a real job in our guide on how to work out the true profit on a job.

The short version

Overheads are the costs of running your business that don't belong to any one job, and your prices are the only way to pay for them. Add them up for the year, divide by your realistic chargeable hours, and build the result into your hourly rate. When your overheads rise, or your chargeable hours fall, your rate has to rise too. Review your overheads every year and whenever something changes.

Put your overheads into every price automatically

TradeProfit builds your overheads into every job for you. Enter your hourly rate, monthly overheads, van costs and working days once. It takes under three minutes. From then on, every job shows your true profit after labour, materials, travel and overheads, before you quote and after you finish. When your overheads change, update them once and every new job reflects it. You can see how to set your rates on the TradeProfit homepage, It's free for three months, and no credit card is needed.

Want to go further? The Complete Guide to Running a Profitable Trade Business has a full section on understanding your business costs. Its free profit toolkit includes a Business Overhead Worksheet and a Charge-Out Rate Calculator, so you can work out your own figures.