# Understanding Your Shop Overhead
Most fabricators know their material costs and have a rough idea of their labour rate. But overhead — the cost of keeping the lights on and the doors open — is the number that quietly kills profitability when it’s ignored.
This guide explains what overhead actually is, how to calculate it, and how to build it into every job you quote.
## What Is Overhead?
Overhead is every business cost that isn’t directly tied to a specific job. You pay these costs whether you’re flat out with work or sitting idle — they’re the fixed and semi-fixed expenses of running your operation.
Overhead includes:
**Fixed costs** — the same every month regardless of workload:
– Workshop rent or mortgage payments
– Equipment loan repayments
– Insurance premiums
– Software subscriptions
– Accounting fees
**Semi-variable costs** — change somewhat based on activity:
– Electricity and gas (higher when machines run more)
– Vehicle fuel and maintenance
– Tool and consumable replacement
– Marketing spend
**Owner costs** — often overlooked:
– Your own wage or draw (if not already in labour)
– Superannuation on your own income
– Home office or vehicle use for business
## Why Overhead Gets Ignored
Most fabricators start out working from gut feel — they charge what feels reasonable and it mostly works when they’re small. But as the business grows, the gap between gut feel pricing and real cost pricing gets wider.
The danger is that a busy shop can still lose money. If your overhead isn’t built into your quotes, every hour of production subsidises your running costs rather than contributing to profit.
## How to Calculate Your Overhead Rate
The goal is to express your overhead as a cost per billable hour, so you can add it directly to any quote.
### Step 1: Add Up Your Monthly Overhead
Go through your bank statements and list every business expense that isn’t materials for a specific job. Group them by category and total them up for the month.
Be thorough — it’s better to slightly overestimate than to miss costs.
**Example monthly overhead:**
| Expense | Monthly Cost |
|———|————-|
| Workshop rent | $2,200 |
| Electricity | $450 |
| Equipment loan | $800 |
| Insurance | $350 |
| Accounting software | $80 |
| Vehicle (business portion) | $400 |
| Phone and internet | $120 |
| Marketing / website | $200 |
| Accounting fees (monthly average) | $250 |
| Miscellaneous | $150 |
| **Total Monthly Overhead** | **$5,000** |
### Step 2: Calculate Your Billable Hours
How many hours per month can your shop actually bill to jobs? This isn’t 40 hours × number of people. Subtract:
– Admin time (quoting, invoicing, emails)
– Maintenance and cleaning
– Machine downtime
– Public holidays and leave
A realistic single-operator shop might have 100–130 billable hours per month. A shop with two tradespeople might have 180–220.
**Example:** 120 billable hours per month (solo operator, realistic)
### Step 3: Calculate Your Overhead Rate
> **Overhead Rate = Monthly Overhead ÷ Monthly Billable Hours**
> $5,000 ÷ 120 hours = **$41.67 per hour**
This is the overhead cost you need to recover on every hour of work you do. Add it to your labour cost when quoting.
## Fixed vs Variable Overhead
Some costs only increase when you take on more work. Understanding which is which helps you make better business decisions.
**Fixed overhead** doesn’t change with volume. Whether you complete 5 jobs or 20 jobs this month, rent is the same. These costs must be covered regardless — they’re the baseline you need to hit before you make any profit.
**Variable overhead** scales with activity. More jobs means more electricity, more consumables, more vehicle use. These are easier to manage but still need to be accounted for.
When your shop is quiet, fixed overhead is the killer. It’s why slow periods hurt more than just the lost revenue — the costs keep running.
## Reducing Overhead Without Cutting Corners
You don’t need to slash costs to improve your overhead position. Often, small adjustments make a meaningful difference:
**Negotiate fixed costs.** Rent, insurance, and equipment loans are all negotiable — especially at renewal time. Even a 10% reduction on rent saves thousands annually.
**Review subscriptions regularly.** Software and services accumulate. Cancel anything you’re not actively using.
**Improve billable hour ratio.** Every hour you spend on admin is an hour that doesn’t recover overhead. Systems, templates, and software that reduce admin time directly improve your profitability.
**Spread overhead across more hours.** If you can take on more work without increasing fixed costs, your overhead rate per hour drops and your margins improve.
## Overhead vs Profit — Know the Difference
This is where many shop owners get confused. Overhead recovery is not profit — it’s just breaking even on your running costs.
Profit is what’s left after you’ve covered materials, labour, **and** overhead. If your quotes don’t include a margin on top of all three, you’re not making profit — you’re just recovering costs.
A common target for fabrication work is 20–30% gross margin on top of full cost recovery. That’s the number that funds equipment upgrades, covers slow periods, and pays you properly for the risk of running a business.
## Track It, Then Improve It
Your overhead rate should be a living number. Review it every quarter — costs change, billable hours change, and your rate needs to reflect reality.
The shops that build sustainable businesses are the ones that know their numbers. Overhead is the foundation of that knowledge — once you understand it, every quote you write is more confident and more accurate.
Use our free **Profit & Loss Statement Generator** to get a clear picture of your total business costs and profitability each month.