Understanding the Business You're Really In — Part 2
- Eric McQuiston, PLA
- 11 hours ago
- 5 min read
Overhead Doesn't Pay for Itself
By Eric R. McQuiston, PLA
Now, before I get a frantic call about the last article — the kind of urgency usually reserved for burst irrigation lines — let me head off the question I know is coming: "Okay, I get the three buckets. But how does overhead actually get paid? Nobody writes a check for it."
Fair question. And a smart one, because it's exactly where most contractors get stuck.
In the first article, we established that every dollar entering your business goes to one of three places — Direct Costs, Overhead, or Profit. Understanding those three categories is the foundation. But foundations don't answer everything on their own, and this particular question deserves its own article: if overhead isn't charged to any one project, how does it ever get paid?
The answer is refreshingly simple. It has to be recovered.
Overhead Doesn't Install Landscapes
Think about everything that happens before your crew ever sets foot on a job site. Someone answered the phone. Someone met with the client, walked the property, and talked them through what was possible. Someone designed the landscape. Someone built the estimate, ordered the materials, and scheduled the crew. Someone paid the insurance premium, kept the books, and ran payroll — probably while also fielding three other phone calls and a text from a supplier about a backordered pallet of sod.
None of that installed a single shrub. And yet, without every bit of it, there's no company capable of installing anything at all.
That's your overhead. It doesn't attach neatly to one job the way a yard of mulch or a day of labor does — it's shared across everything your company does, whether you built one landscape this year or fifty. Which is exactly why so many contractors lose track of it. It's real money, spent every week, and it never shows up as a line item on a single invoice.
The Concept of Overhead Recovery
Here's the part I want every emerging contractor to really sit with: overhead doesn't pay for itself. It has to be recovered, project by project, the same way you recover the cost of a yard of soil or an hour of labor.
Every landscape you install should be quietly chipping in toward office staff, estimating, sales, insurance, accounting, office rent, utilities, software, marketing, licenses, the truck that never leaves the office parking lot, and the hours you spend on administrative work that never once involves a shovel.
If your pricing doesn't recover those costs, they don't just disappear. They come out of somewhere — and that somewhere is almost always your profit, quietly, one job at a time, until you're standing in front of a year-end statement wondering where it all went. Sound familiar?
How Overhead Actually Gets Recovered
Here's where I have to disappoint anyone hoping for a magic formula: there isn't one universal method, and anyone who tells you otherwise is selling something.
Some contractors recover nearly all their overhead through labor. Others spread it across labor and materials. A few fold equipment into the mix. What matters isn't which method you pick — it's whether your method consistently and honestly recovers what it actually costs to keep your doors open.
Personally, I've always leaned on marking up labor and materials — sometimes split evenly, sometimes sixty-forty depending on the year and the workload. I don't lean much on equipment or subcontractors for recovery, though plenty of good operators do it differently, and that's fine. The exact percentages matter far less than whether they add up to the truth about your business.
Let Your Business Tell You the Answer
Picture two companies. The first builds elaborate residential landscapes — mature trees, full irrigation systems, decorative stone, thousands of dollars in plant material moving through the yard every week. Recovering overhead through a material markup makes obvious sense there.
Now picture a maintenance company — mowing, trimming, routine upkeep. Material costs are modest. Labor is nearly everything. That company's overhead recovery is going to live almost entirely in its labor rate, and there's nothing wrong with that either.
Neither business is doing it "correctly" or "incorrectly." They're just different businesses, earning revenue in different ways — and your recovery strategy should reflect exactly how yours earns its keep, not how someone else's does.
Markup Is a Tool, Not the Goal
I hear this question constantly: "What markup should I be using?" I understand the appeal of wanting a single number — it would make bidding a lot simpler — but there isn't one, because markup was never the goal to begin with. It's just the mechanism.
The real objective is simpler and far more important: make sure every dollar of overhead gets paid for by the work your company actually performs. Only once that's done are you in a position to talk about profit at all.
Overhead Recovery Is Not Profit
This is the mistake I see most often, even among contractors who've been running crews for years: treating overhead recovery and profit as the same thing. They are not, and confusing the two is how otherwise smart business owners quietly work themselves out of a margin.
Overhead recovery pays for operating the business. Profit rewards you for the risk of owning it. I think about pricing in four honest steps: determine the direct costs, recover the overhead required to run the business, add the profit you actually want, and only then arrive at your selling price. Profit was never hidden inside overhead — it comes after overhead has already been paid in full.
A Simple Way to Check Yourself
Next time you're building an estimate, ask yourself two questions, in this order.
Have I recovered every dollar it costs to operate my business? If the honest answer is no, you're not ready to talk about profit yet — full stop.
Only once that first question is settled should you ask the second one: what return should ownership actually earn for the risk of running this company?
Two very different questions. Keep them separate, and your pricing — and your year-end statement — will make a lot more sense.
Looking Ahead
In the next article, we're tackling a topic that trips up almost every contractor at some point: owner compensation. Should your salary come out of profit? What happens when you spend part of your day installing irrigation, part of it estimating, and the rest managing your crew — which hat are you wearing when it comes to getting paid?
The answer might surprise you. But once you've got direct costs, overhead, and profit sorted out the way we've discussed, it becomes a lot more straightforward than it sounds.
Closing Thought: A landscape company doesn't become profitable because it marks work up. It becomes profitable because it recovers every cost of doing business first — and only then intentionally earns a return for the risk of owning it.
~ Eric
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