What is Overhead recovery?

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?

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:

Now build the hourly rate from the bottom up:

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.

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.

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.

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.

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.