Overhead and Profit Margin

Overhead and Profit Margin

Running a business costs money. We call this cost overhead. The overhead is the cost of everything related to running a business that does not pertain to a particular job. Do you have an office staff? They need to be paid! Do you have an accountant or CPA you work with? What about your office? Do you own or lease a building? Do you do any marketing (even including little pens and business cards)? All of these things need to be taken into consideration.

On top of overhead, you should also consider adding a profit margin to your bid. The profit margin is not money that just goes into your pocket (hopefully). This is money that is used for building the company. This could be money that is used to pay off debts the company may have. This could be used for training staff or buying new tools. This money could also be used for end-of-year bonuses to show appreciation for the hard work and dedication of your employees. 

If you do not include overhead or profit in your bids, you will be doing a project “at cost.” This means that you will not be building or growing your company as you work. If your direct costs for a project are $5,000. You may include 10% for overhead and 15% for the profit margin. These would be $500 and $750, respectively. So your total would be $6,250. Many companies will take this number and add a markup. This could be an additional 10% or 20% to cover unforeseen expenses (like overtime to meet a deadline) or expenses not directly included in the bid.