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Glossary · Money & accounting

What is Overhead recovery?

Overhead recovery for contractors: the overhead-per-billable-hour formula, a worked labor rate build, and what happens when billable hours fall short.

Updated October 15, 2026 · 6 min read

Definition

Overhead recovery means pricing your work so every billable hour pays its share of the costs that aren't tied to any one job: office staff, rent, insurance, software, marketing and non-job vehicle costs. You find the amount by dividing annual overhead by the billable hours you expect to sell, then add that figure to your burdened labor cost before adding profit.

Also called: overhead absorption, overhead allocation, indirect cost recovery, overhead rate

Formula

Overhead per billable hour = annual overhead ÷ annual billable hours

Example: $600,000 ÷ 12,000 billable hours = $50 every billable hour must carry

Measured as
Dollars of overhead per billable hour
Inputs
Annual overhead budget, expected billable hours
Biggest swing factor
Billable hours, not the overhead total
Review
At budget time and whenever headcount changes
Feeds into
Hourly rate and flat-rate task prices

The usual pricing mistake isn't charging too little for the tech. It's charging nothing for the office. A labor rate built from wages and parts covers the job in front of you and leaves the dispatcher, the rent, the insurance and the marketing bill to be paid out of profit. Overhead recovery is the arithmetic that stops that from happening.

Overhead recovery in plain English

Your business has two kinds of cost. Direct costs follow a specific job: the technician's time on it, the parts, the permit. Overhead doesn't belong to any one job, but every job needs it to exist. Someone answered the phone, someone dispatched the truck, the truck was insured, the software sent the invoice.

The federal cost principles used for government contracts describe the same idea in formal terms: indirect costs are accumulated "by logical cost groupings" and allocated to jobs using a base "common to all cost objectives."1 For a service contractor, the natural base is the billable hour. Every hour you sell carries a slice of overhead, and if your prices include that slice, overhead is recovered.

How do you calculate overhead per billable hour?

Overhead recovery rate

Annual overhead ÷ annual billable hours = overhead per billable hour

There are two inputs, and the second one is where most shops go wrong.

  1. 1

    Budget next year's overhead

    Add every cost that isn't a direct job cost: office and dispatch wages with their burden, the owner's market-rate salary, rent, utilities, insurance, software, phones, marketing, accounting, and vehicle costs you don't charge to jobs.

  2. 2

    Count paid field hours

    Technicians times the hours you'll pay each of them. Eight techs at 2,080 hours is 16,640 paid hours.

  3. 3

    Apply your real billable share

    Multiply by the share of paid hours you actually bill, from last year's records. Drive time, shop time, training, callbacks and slow days all reduce it.

  4. 4

    Divide

    Overhead budget ÷ billable hours. That is what each billed hour must carry before any profit.

A worked example

Here is a made-up 8-technician shop:

InputValue
Annual overhead budget$600,000
Paid field hours (8 techs × 2,080)16,640
Billable share from last year's records72%
Billable hours11,981 (call it 12,000)
Overhead per billable hour$50

Now build the hourly rate from the bottom up:

Rate componentPer billable hour
Technician wage, $32 per paid hour ÷ 72% billable$44.44
Payroll taxes, insurance and benefits (example: 30% of the wage cost)$13.33
Overhead recovery$50.00
Break-even rate$107.77
Profit at 15% of price: break-even ÷ 0.85$126.79

Two details in that table matter. First, the wage is divided by the billable share, because you pay for 2,080 hours and bill fewer. Second, the burden figure is an example; check your own payroll. For context, the Bureau of Labor Statistics reports that benefits made up 30.0% of private employers' total compensation cost per hour worked in June 2026.2 Your workers' comp class, vehicle policy and paid time off will move your number.

Free calculatorLabor rate & flat-rate price calculatorFind the hourly rate you need to charge to hit your profit goal, then price any job.

What happens when billable hours fall short?

Overhead is mostly fixed. Billable hours are not. If you price for 12,000 hours and sell 10,000, each hour still carried $50, so you recovered $500,000 of a $600,000 overhead bill. The missing $100,000 comes straight out of profit.

Overhead per billable hour at different billable shares (example shop, $600,000 overhead, 16,640 paid hours)

Hypothetical example built from the worked numbers on this page, not industry data.

Overhead per billable hour at different billable shares (example shop, $600,000 overhead, 16,640 paid hours)
60% billable$60.1
65% billable$55.47
72% billable$50.08
80% billable$45.07

This is why overhead recovery and billable hours belong on the same report. A slow shoulder season or a tech spending a week on callbacks raises the real overhead per hour even if no overhead line item changed. The utilization, productivity and efficiency article covers how to measure billed time honestly.

Overhead recovery vs markup on materials

Some shops try to recover overhead with a big material markup instead of a higher labor rate. It works on paper until the job mix changes.

 Overhead in the hourly rateOverhead in material markup
FollowsTime spent, which is what drives most overheadMaterial value, which often isn't
Labor-heavy repairRecovers its shareUnder-recovers: little material to mark up
Equipment-heavy installRecovers its shareCan over-price and lose bids
When customers supply partsStill recoveredLost entirely
Best useThe main recovery method for service workA modest handling charge on top

Common mistakes

  • Using paid hours as billable hours. It makes overhead per hour look smaller than it is, so every price is too low.
  • Leaving out the owner's salary. If the owner would have to be replaced by a paid manager, that salary is overhead.
  • Budgeting last year's overhead. Recover next year's costs, including the hire you already plan to make.
  • Setting it once. A new office hire costing $55,000 a year with burden adds about $4.58 to every billable hour in the example shop.
  • Counting overhead twice. If flat-rate task prices already include an overhead charge, don't add it again on the invoice as a separate fee.

Quarterly overhead recovery check

  • Actual overhead for the quarter, from the profit and loss statement
  • Billable hours sold in the quarter
  • Overhead recovered: billable hours × your overhead rate
  • Gap between recovered and actual, in dollars
  • Billable share by technician, compared with the budget
  • Any new fixed costs since the rate was set

How TradesWork helps

TradesWork doesn't hold your overhead budget; that lives in your accounting system. It does give you the hours side of the equation. Timesheets record regular and overtime hours per technician with a payroll export, and job statuses record drive and on-job time, so you can compare billed hours with paid hours by tech. Job costing uses each person's burdened rate, which owners and admins set in payroll settings, so gross margin reflects real labor cost before overhead is considered.

For setting task prices once your rate is built, see flat-rate pricing and the HVAC pricing guide.

Footnotes

  1. Federal Acquisition Regulation 31.203, Indirect costs, paragraphs (b) and (c), via Acquisition.gov, checked October 2026. https://www.acquisition.gov/far/31.203 ↩

  2. U.S. Bureau of Labor Statistics, Employer Costs for Employee Compensation, June 2026: private industry benefits were $14.07 of $46.89 total compensation per hour worked (30.0%). https://www.bls.gov/news.release/ecec.nr0.htm ↩

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  • Overhead and labor cost calculator
  • Billable hour and target margin model
  • Task pricing sheet with materials markup
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  • Member discount column

Frequently asked questions

Any cost you'd still pay if you ran no jobs this week: office and dispatch wages, the owner's market-rate salary, rent, utilities, general liability insurance, software, phones, marketing, accounting fees, and vehicle costs not charged to jobs. Field labor on jobs, parts, equipment, subcontractors and permits are direct costs, not overhead.

Sources

Last reviewed October 15, 2026. Third-party sources are marked; some are written by competing vendors.

  1. 1.FAR 31.203, Indirect costs (Acquisition.gov)
  2. 2.BLS, Employer Costs for Employee Compensation, June 2026

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