Knowing Your Overheads — How to Work Out Your True Costs and Price for Profit (2026)

Direct Costs vs Overheads — Know the Difference

Before you can price properly you need to split your costs into two clear buckets. Getting this distinction right is the foundation of everything else.

Direct costs (also called job costs or variable costs) are the costs you only incur because you took on a specific job. If the job didn't exist, neither would the cost. These are things like the materials for that job, hired plant or access equipment, a subcontractor's labour, and the skip you ordered for that particular site. Direct costs scale up and down with the work you do.

Overheads (also called fixed costs or running costs) are the costs of being in business at all — whether or not you have a job on this week. The van still needs insuring, the phone bill still arrives, the accountant still does your return. These costs keep ticking over even when you're sitting at home with an empty diary. They are the costs most easily forgotten when you price, precisely because they aren't tied to any one job.

A typical UK sole trader or small trade firm will have most of the following overheads:

• Van lease or finance — monthly payments, plus depreciation if you own it outright
• Fuel — diesel or petrol for getting to and from jobs and suppliers
• Insurance — public liability, tools cover, and van insurance (and employer's liability if you have staff)
• Phone and broadband — your business mobile and home or office internet
• Accountant and software — bookkeeping, accounts, quoting and job-management tools
• Tools and replacement — wear, breakage, theft and the steady cost of keeping a working kit
• Advertising and website — Google ads, social, directory listings, leaflets, your domain and hosting
• Professional memberships and certs — Gas Safe, NICEIC, trade body membership, scheme renewals
• Workwear and PPE — boots, hi-vis, gloves, masks and branded clothing
• Premises or storage — a unit, lock-up or yard if you have one
• Bank charges — business account fees, card machine fees and finance interest
• Training — refresher courses, new tickets and keeping qualifications current

Add Up Your Annual Overheads

The next step is simple but it's the one most people never do: total up your overheads for a full year. Don't guess. The numbers are already sitting in your records — your last set of accounts, your bank statements, your card statements and your direct debit list will show almost everything. Go through twelve months and pull out every cost that exists because the business exists, regardless of any single job.

Work in annual figures so nothing gets lost. A monthly insurance direct debit, an annual scheme renewal, an irregular tool purchase — convert them all to a yearly number and add them together. The total often surprises people. Costs that feel small one at a time add up to a serious number across a year.

For example, a typical solo tradesperson running one van might land somewhere around £12,000 to £18,000 of annual overheads once everything is counted — van finance and fuel, insurance, phone, accountant, software, tools, advertising, certs and the rest. Your figure will be different, and that's the point: you need your number, not an average. The illustrative breakdown below shows how it stacks up.

These figures are illustrative only — use them as a template to plug in your own.

Billable Days — You Can't Charge for 365

Here's the trap that catches almost everyone: there are 365 days in a year, but you cannot bill a customer for anywhere near that many. Your overheads have to be recovered across only the days you actually earn money — and that number is a lot smaller than people assume.

Start at 365 and take out everything you don't get paid for:

• Weekends — roughly 104 days a year gone straight away if you don't work them
• Holiday — a few weeks off, plus bank holidays
• Sickness — you don't get sick pay, but you still lose the days
• Bad weather — washed-out days for outdoor trades like roofing, groundwork and landscaping
• Quoting, admin and travel — time spent pricing jobs, chasing invoices, ordering materials and driving between sites
• Unpaid downtime — gaps between jobs when the diary just isn't full

Once you strip all that out, a realistic figure for most sole traders is somewhere around 200 to 220 chargeable days a year — and for weather-dependent trades it can be lower. That is the number you actually recover your overheads across. If you assume you'll bill 250 or 300 days and you only manage 210, every job you do is underpriced. Be honest with this figure; optimism here is expensive.

Recovering Overheads Into Your Rate

This is the core of pricing for profit. Once you know your annual overheads and your realistic billable days, you can work out exactly what you must charge. The method is straightforward.

First, divide your annual overheads by your billable days. That tells you how much overhead you must recover per day just to break even on your fixed costs — before you've paid yourself a penny or made any profit. Then add the wage or drawings you need to take home each day, and add your profit margin on top. The formula in words is:

(Annual overheads + your wage + profit) ÷ billable days = day rate

Let's run a clearly illustrative example with round numbers. Say your annual overheads come to £14,000 and you reckon on 200 billable days. You want to pay yourself a wage of £36,000 a year, and you want a 15% profit on top so the business itself — not just your wages — actually makes money.

So in this example you'd need to charge roughly £288 a day, or about £36 an hour, on your labour before materials, just to hit your wage and profit targets. If your gut-feel rate is £200 a day, you can now see precisely why the money disappears — you're nearly £90 a day short on every single job. Plug in your own overheads, wage and billable days and the maths does the rest.

Your Break-Even Point

Your break-even is the turnover you must hit across the year to cover all your overheads plus the wage you need to pay yourself. Earn that, and you've stood still — covered your costs and paid yourself, with nothing extra. Earn below it, and you're losing money, even if the bank balance hasn't turned red yet.

Knowing your break-even is powerful because it tells you the minimum amount of work you must win. In the example above, with £14,000 of overheads and a £36,000 wage, your break-even is £50,000 of labour turnover a year — anything you bill above that is genuine profit. Suddenly you can look at a quiet month and know exactly how worried to be, rather than guessing.

Margin on Materials and Subbie Labour

The day-rate calculation above covers your own labour and overheads. But don't make the classic mistake of passing materials and subcontractor labour through at cost. When you buy and supply materials, you carry the handling, the waste, the cost of running to the merchant, the risk if something fails, and the finance of paying for it before the customer pays you. That all deserves a markup.

A markup of 10% to 20% on materials is standard and fair across UK trades — sometimes more on small or fiddly orders. The same applies to subcontractor labour: if you're managing a subbie, standing behind their work and carrying the risk, you mark up their day rate too rather than charging the customer exactly what you pay out. Charging materials and subbies at cost is money left on the table on every job.

Common Mistakes That Quietly Kill Trade Businesses

• Copying a competitor's day rate without knowing your own costs. Their overheads, billable days and wage are not yours — their rate might be losing them money too.
• Forgetting non-billable days. Pricing as if you bill 300 days when you really bill 210 underprices every job by a third.
• Not paying yourself a proper wage. If your "profit" is really just your underpaid wages, the business isn't profitable — you're just working cheap.
• Not reviewing rates as costs rise. Fuel, insurance, finance and material prices climb with inflation. A rate that worked two years ago may be underwater now.
• Not setting money aside for tax. Tax isn't an overhead, but it's real and it must be funded out of profit. Put a slice of every payment aside so the bill in January or July doesn't wipe you out.

Practical Steps to Take Now

• List your overheads for the last twelve months using your accounts and bank statements, and total them up.
• Work out your realistic billable days by stripping weekends, holiday, sickness, bad weather and admin off 365.
• Calculate your minimum day rate using (overheads + wage + profit) ÷ billable days.
• Compare it to what you currently charge. If you're below the number, that's your gap — and your reason to put prices up.
• Review annually. Redo the whole calculation every year, because your costs move and so should your rate.

Good bookkeeping and job-costing software makes this far easier — it tracks your overheads as they happen, shows the true cost and profit of each job, and means you're never guessing at year end. Once your numbers live in one place, knowing your overheads stops being an annual scramble and becomes something you can see at a glance.

Frequently Asked Questions

What counts as an overhead in a trade business?

An overhead is any ongoing cost of being in business that you'd still pay even with no jobs booked in — van finance, fuel, insurance, phone, accountant, software, tools, advertising, certs, workwear and the like. It's the opposite of a direct cost, which only exists because of a specific job (materials, a subbie, a skip for that site). If the cost disappears when the job disappears, it's a direct cost; if it keeps ticking over regardless, it's an overhead.

How do I work out my day rate?

Add your annual overheads to the wage you want to pay yourself, add a profit margin on top, then divide the total by your realistic billable days for the year. That gives the day rate you must charge on labour to cover your costs, pay yourself and make a profit. Divide by your working hours per day to get the equivalent hourly rate. Then add a markup on materials and subbie labour separately.

Why am I busy but not making money?

Almost always it's because your rate doesn't recover your overheads. A full diary at a rate that only covers the job in front of you means you're working hard to break even or worse — the busier you are, the more you lose. The fix isn't more work, it's the right price: calculate your true overheads and billable days, set a rate that covers them plus your wage and profit, and the same workload starts leaving money in the bank.