How LMN Calculates Overhead, Labor Burden, and Profit in Estimates

In this article:

How LMN Calculates Overhead, Labor Burden, and Profit in Estimates Overview

Where These Numbers Come From in LMN

Key Definitions

How LMN Builds a Price from your Budget

Why a 37% Overhead Ratio Can Show as a 204% Overhead Markup

Budget/Estimating FAQ

        How does LMN produce an overhead margin from the budget I created?

        Is labor burden included in the overhead margin?

        When I add a new labor item, do I need to add a labor burden %?

        Is profit included in the 204% overhead markup?

        If my overhead ratio is 37%, why does my overhead markup show as 204%?

        Does LMN treat labor burden as a direct cost?

        How do labor burden and unbillable % affect my Unit Cost?

Budget/Estimating Troubleshooting Checklist

How LMN Calculates Overhead, Labor Burden, and Profit in Estimates Overview

This article explains how LMN:

• Uses your Operating Budget to calculate overhead markup

• Treats labor burden (direct cost vs overhead)

• Applies profit margin separately from overhead

• Can show a relatively “high” overhead markup (e.g., 204%) even when your overhead ratio in the budget is lower (e.g., 37%)

(All numbers below are examples only, for illustration.)

Where These Numbers Come From in LMN

You’ll see these values in three main places:

Key Definitions

How LMN Builds a Price from your Budget

When LMN builds a labor rate from your budget, the logic is:

1. Average wage (per person per hour) from the budget

2. Apply labor burden % (from the budget) to get a loaded labor cost

3. Apply overhead markup % (from the Overhead Recovery tab) to recover overhead

4. Apply profit margin % (from the budget) to reach the final sell rate

Example (illustrative only):

• Wage = $25/hour

• Labor burden = 29%

  • Burden = $25 × 29% = $7.25

  • Loaded labor cost = $32.25/hour

• Overhead markup = 204%

  • Overhead = $32.25 × 204% ≈ $65.79

  • Cost + overhead ≈ $98.04/hour

• Profit margin = 10%

  • Profit = $98.04 × 10% ≈ $9.80

  • Final sell rate ≈ $107.84/hour

At a high level:

Sell price = Direct Costs (including labor burden) + Overhead + Profit

Why a 37% Overhead Ratio Can Show as a 204% Overhead Markup

The key is what you’re marking up.

Example A – Overhead spread across all direct costs

Suppose your annual budget has:

• Forecast sales: $1,000,000

• Total overhead: $370,000

• Total direct costs (labor + burden + equipment + materials + subs): $630,000

Then:

• Overhead ratio = 370,000 ÷ 1,000,000 = 37% of sales

• If overhead is recovered on all direct costs, the overhead markup would be:

  Overhead markup = Overhead ÷ Direct Costs
  = 370,000 ÷ 630,000 ≈ 58.7%

So in this case, you might see an overhead markup around 59%.

Example B – Overhead recovered only on labor

Now, use the same overhead and sales, but change how you recover overhead.

Assume:

• Forecast sales: $1,000,000

• Overhead: $370,000

• Direct cost breakdown:

  • Labor (wage + burden): $180,000

  • Other direct costs (equipment, materials, subs): $450,000

If your Overhead Recovery method is set so that LMN recovers residual overhead only on labor (as with MORS where labor picks up remaining overhead), then the markup on labor is:

Overhead markup on labor = Overhead ÷ Labor Costs
= 370,000 ÷ 180,000 ≈ 205%

Here:

• Overhead ratio is still 37% of sales.

• Overhead markup on labor is about 205% of labor cost.

That’s how a budget that shows “37% overhead” can legitimately produce a labor overhead markup around 204–205% in the catalog.

Summary:

• The ratio is “overhead as % of sales.”

• The markup is “overhead as % of the cost base you chose.”

The smaller the cost base you spread overhead over (e.g., labor only), the higher the markup % must be to recover the same overhead dollars.

Budget/Estimating FAQ

How does LMN produce an overhead margin from the budget I created?

From your Operating Budget, LMN:

1. Totals your overhead dollars.

2. Compares overhead to sales to understand your overhead ratio.

3. Uses your chosen Overhead Recovery method (MORS / FLH / SORS) and the associated cost base (labor, equipment, materials, subs, or some combination).

4. Divides the appropriate overhead amount by that cost base to calculate the overhead markup % used in the catalog and estimates.

Is labor burden included in the overhead margin?

No.

• Labor burden is part of your direct labor cost.

• Overhead markup is applied on top of that loaded labor cost (and/or other costs, depending on recovery method).

The stack is:

Wage → Wage + Labor Burden → + Overhead Markup → + Profit Margin

Labor burden is not counted as overhead.

When I add a new labor item, do I need to add a labor burden %?

You don’t re‑enter the burden % manually. Instead:

• Set your labor burden % correctly in your Operating Budget (Field Labor tab).

• The labor catalog reads that % and uses it in the Unit Cost calculation.

• In the Labor catalog, you enter the average wage only; LMN automatically applies labor burden, overtime factor, and unbillable % from the budget.

See: Price List: A Guide – Labor Catalog

Is profit included in the 204% overhead markup?

No.

• A number like 204% (or any overhead %) is for overhead recovery only.

• Profit margin is separate and applied after overhead.

Flow: Direct Costs (including burden) → Overhead Markup → Profit Margin

If my overhead ratio is 37%, why does my overhead markup show as 204%?

Because:

• 37% is Overhead ÷ Sales.

• 204% is Overhead ÷ (Labor Cost base) (for example) when LMN concentrates overhead recovery on labor.

If you concentrate the same overhead dollars on a smaller slice of your total costs (e.g., labor only instead of all costs), the markup % has to be larger.

Does LMN treat labor burden as a direct cost?

Yes.

• Labor burden is treated as part of your direct labor cost in estimates and job costing.

• Overhead is reserved for broader business expenses that are not tied to one specific job’s hours.

How do labor burden and unbillable % affect my Unit Cost?

For labor items, the Unit Cost formula in estimates is:

Labor Unit Cost = Average Wage

• Overtime Factor markup

• Unbillable % markup

• Labor Burden % markup

Overhead and profit are layered after this Unit Cost to get breakeven and final price.

See: Estimating | FAQ – Understanding Unit Cost

Budget/Estimating Troubleshooting Checklist

If your overhead % looks “too high” (for example, 204%):

1. Check the Overhead Recovery method in your budget

   • Budget > Edit > OH Recovery tab

   • Are you using MORS, FLH, or SORS?

   • Are you recovering overhead on labor only, or also on materials/equipment/subs?

2. Compare overhead dollars to the size of the cost base

   • Large overhead + small cost base (labor only) → high markup % is expected.

3. Verify labor burden %

   • Ensure your labor burden % is realistic (typical range is roughly 13–25%, but depends on your company and region).

   • Don’t also “bake in” burden by inflating the wage; that would double‑count.

4. Confirm profit margin settings

   • Make sure the profit margin in your Budget matches what you intend to charge.

   • Remember: profit is separate from overhead.

5. If numbers still don’t make sense

   • Capture:

     • Budget summary (sales, overhead, chosen Overhead Recovery method)

     • Overhead ratio (% of sales)

     • Overhead markup % from the OH Recovery tab or catalog

   • Share those details with Support for a walkthrough specific to your account.