Business Overhead: What It Is and How to Calculate It

What is business overhead?

Overhead is every cost your business incurs that isn’t directly tied to a specific project or deliverable. You pay these costs whether or not you have clients this month.

Common examples:

• Rent & utilities — office space, coworking membership, electricity, internet
• Software & tools — project management, design tools, hosting, subscriptions
• Accounting & legal — bookkeeper, tax prep, business registration
• Insurance — liability, professional indemnity, health
• Marketing — website, ads, email platform
• Admin salary — if you have staff handling non-billable work

Overhead is not the same as project cost. It’s the cost of being in business, regardless of how busy you are.

Types of overhead costs

Not all overhead behaves the same. Understanding the type helps you predict and control it.

Type	Definition	Examples
Fixed overhead	Stays the same regardless of revenue or workload	Rent, insurance, loan payments, salaried staff
Variable overhead	Rises or falls with business activity	Freelancer payments, shipping, transaction fees
Semi-variable overhead	Has a fixed base plus a variable component	Phone plan (base + overages), utilities, cloud hosting with usage tiers

For a deeper breakdown of fixed and variable costs, see Fixed vs. Variable Costs.

How to calculate your overhead rate

The overhead rate tells you what percentage of your revenue goes to running the business — before you pay yourself or earn a profit.

Example: Your monthly overhead is $3,000 (rent, software, insurance, accounting). Your monthly revenue is $10,000.

• Overhead Rate = $3,000 ÷ $10,000 × 100 = 30%
• For every dollar you earn, $0.30 goes to overhead

Use the calculator above to find your number. If it’s above 50%, your overhead is eating too much of your revenue.

Predetermined overhead rate formula

Service businesses often use a predetermined overhead rate to allocate overhead across projects before actual costs are known. This is useful for quoting.

The activity base can be direct labor hours, direct labor cost, or project revenue — whatever best represents how your business consumes overhead.

Example: You estimate $36,000 in annual overhead and 1,200 billable hours.

• Predetermined rate = $36,000 ÷ 1,200 = $30 per billable hour
• A 20-hour project should carry $600 in overhead allocation

This keeps your quotes consistent and ensures overhead isn’t forgotten on smaller jobs.

Direct vs. indirect costs

Overhead is one type of indirect cost, but the distinction matters when building a project quote:

• Direct costs — materials, subcontractors, project-specific tools. These go on the invoice.
• Indirect costs (overhead) — rent, software, admin. These are spread across all projects.

If you only quote direct costs, you’re subsidizing every project with your own money. Overhead must be built into your pricing — either as a line item or baked into your hourly rate.

For a complete list of costs that erode your margins, see Hidden Costs Explained.

How to reduce overhead costs

You can’t eliminate overhead, but you can make it leaner. Focus on the biggest line items first:

• Audit subscriptions quarterly — cancel tools you don’t actively use. Most businesses pay for 30–40% more software than they need.
• Renegotiate recurring contracts — insurance, hosting, phone plans. Ask for annual pricing or competitor-match discounts.
• Automate repetitive admin — invoicing, scheduling, expense tracking. Every hour of admin you automate is an hour you can bill.
• Share resources — coworking instead of a private office, shared tools with partners, group insurance plans.
• Review staffing structure — contractors for variable work, full-time only for consistent demand. Match labor cost to labor need.
• Track overhead monthly — what gets measured gets managed. A simple spreadsheet of monthly overhead vs. revenue is enough to spot trends.