{"id":22154,"date":"2024-09-11T08:14:09","date_gmt":"2024-09-11T12:14:09","guid":{"rendered":"https:\/\/www.foundationsoft.com\/?p=22154"},"modified":"2025-04-14T16:37:24","modified_gmt":"2025-04-14T20:37:24","slug":"conquering-construction-overhead-allocation","status":"publish","type":"post","link":"https:\/\/www.foundationsoft.com\/learn\/conquering-construction-overhead-allocation\/","title":{"rendered":"Conquering Construction Overhead Allocation"},"content":{"rendered":"<p>Overhead allocation is one of the most challenging concepts that contractors face when running their businesses, but it\u2019s an essential task in determining a company\u2019s profitability.<\/p>\n<p>As detailed by Buildertrend, overhead is, in fact, one of only two factors that impact your profit\u00a0<a href=\"https:\/\/buildertrend.com\/blog\/construction-overhead\/\" target=\"_blank\" rel=\"noopener\">margin<\/a> (the other being markup).\u00a0In other words, to complete a project in the black, construction professionals need to understand their overhead.<\/p>\n<p>On the surface, overhead allocation seems simple. In addition to direct costs for <strong>materials<\/strong>, <strong>labor<\/strong>, <strong>burden<\/strong>, subcontractors, and equipment, companies must account for indirect costs \u2014 or overhead.<\/p>\n<p>The difficulty, however, is in the name: indirect costs are all the indirect expenses that aren\u2019t directly related to any project \u2014 think rent and insurance \u2014 so these costs can get accidentally brushed under the rug when budgets are being determined.<\/p>\n<a target=\"_blank\" href=\"\/learn\/#schedule-a-live-demo\" class=\"blog-cta-image\"><img decoding=\"async\" src=\"\/wp-content\/uploads\/2024\/03\/FSL-blog-post-ad-see-how.png\" alt=\"Get a Demo\" title=\"Get a Demo\"><\/a>\n<p>But unlike decades ago, today\u2019s technology, like <strong><a href=\"https:\/\/www.foundationsoft.com\/learn\/does-construction-job-costing-really-matter\/\">construction job costing software<\/a>,<\/strong> gives contractors the ability to easily track overhead costs, calculate a ratio against actual expenses, and report this in a way that\u2019s understandable and accurate.<\/p>\n<p>In this article, we\u2019re going to dive deep into overhead costs: what it is, how to manage them, and how construction solutions simplify the tracking and calculations. By the end, you\u2019ll know exactly how to conquer your <strong>overhead in construction<\/strong>.<\/p>\n<p><strong>Article Highlights:<\/strong><\/p>\n<ul>\n<li>Accurate overhead allocation is essential for <strong>construction financial management<\/strong>, as it impacts profit margins alongside markup and includes<strong> indirect costs<\/strong> like office rent and insurance.<\/li>\n<li>Contractors can use either the Job Cost Method or the General Ledger Method to calculate their <strong>overhead rate<\/strong>, helping determine the true cost of projects by factoring in both direct and indirect expenses.<\/li>\n<li>Construction accounting software streamlines<strong> cost control<\/strong> by automating overhead calculations and offering customizable job cost structures to <strong>track all expenses<\/strong>, including indirect costs.<\/li>\n<li>Regular monitoring and <strong>allocation of overhead<\/strong>, including all indirect costs and expenses, provides contractors with a more precise understanding of their financial position and project profitability.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Overhead_Costs\"><\/span><strong>Overhead Costs<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In the construction industry, overhead costs are the expenses incurred for running the construction business in general. They typically aren\u2019t aligned with any single task nor are they associated with those costs gained throughout a construction project.<\/p>\n<p>Some examples of overhead costs include:<\/p>\n<ul>\n<li><strong>Office rent <\/strong><\/li>\n<li>Taxes for the construction business<\/li>\n<li>Insurance<\/li>\n<li>Administrative costs<\/li>\n<li><strong>Utilities <\/strong>for the office building<\/li>\n<li><strong>Advertising<\/strong><\/li>\n<li><strong>Building permits<\/strong><\/li>\n<\/ul>\n<p>Also, note that overhead costs are rarely consistent. The rent may remain stable, but insurance costs, utilities and taxes can all vary depending on the year and the location of the office building.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Tracking_Overhead_Costs\"><\/span><strong>Tracking Overhead Costs<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Many contractors simply fail to allocate their indirect costs, and, of those that do, most perform a partial <strong>allocation<\/strong> at best.<\/p>\n<p>In either case, contractors see only a portion of their true <strong>job <a href=\"https:\/\/www.foundationsoft.com\/learn\/the-secrets-to-job-costing\/\">costs<\/a><\/strong>.<\/p>\n<p>To get a true account of a<strong> construction company\u2019s<\/strong> job costs, contractors must allocate all their indirect costs. Which means construction accountants, or the <strong>administrative staff<\/strong>, need to get accustomed to remembering these costs throughout the budgeting process.<\/p>\n<p>The greatest challenge lies in how to calculate the allocation of this type of overhead.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Select_Your_Overhead_Allocation_Method\"><\/span><strong>Select Your Overhead Allocation Method<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Generally, two <a href=\"https:\/\/www.foundationsoft.com\/learn\/overhead-allocation-methods\/\">methods<\/a> are used to allocate overhead in construction. Which method to use is a decision best made with the help and advice of a construction CPA, accounting professional or <strong>legal counsel.<\/strong><\/p>\n<ol>\n<li><strong>Job Cost Method<\/strong>: This technique uses a single, pre-determined rate multiplied by the direct costs of the job to determine overhead costs.\n<ol>\n<li>The rate is typically determined by using historical costs and working with an accountant to come up with the correct percentage.<\/li>\n<li>For example, let\u2019s say a contractor determines they will apply 8% of indirect costs to each project. The contractor will take the <strong>direct costs<\/strong> of each project and multiply that by 8% to get a better view into profitability.<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<ol start=\"2\">\n<li><strong>General Ledger Method<\/strong>: Instead of using an estimated rate, the general ledger method requires contractors to track indirect costs in the same way that direct job costs are tracked.\n<ol>\n<li>A percentage of those indirect costs is then allocated to each job based on the job\u2019s percentage of total actual costs.<\/li>\n<li>For example, if one job\u2019s costs represent 25% of the total costs on all jobs, that job receives 25% of the overhead expenses for the period.<\/li>\n<li>The general ledger method also allows for more complex formulas to accommodate \u201cweighting\u201d of overhead costs based on the types of costs that are most relevant to the contractor.<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<p><span style=\"box-sizing: border-box; margin: 0px; padding: 0px;\">Overall, the job cost method is simpler and, therefore, works better for small companies that not only have fewer projects but also fewer\u00a0<strong>indirect costs<\/strong>.<\/span><\/p>\n<p>The <strong>general ledger<\/strong> method may be complex, but it better splits the costs among a company\u2019s <strong>construction jobs<\/strong>, that way the small projects aren\u2019t overburdened by extra payments.<\/p>\n<p>Either way, experimentation is always helpful. If one method doesn\u2019t work with operational flow, then tweak and move to the next one.<\/p>\n<p>Always keep in mind that these aren\u2019t absolute boundaries. One can create a blended system that works for their administrative needs.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Simplify_Your_Construction_Allocation_With_Technology\"><\/span><strong>Simplify Your Construction Allocation With Technology<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Tracking costs is already difficult, and adding <span style=\"text-decoration: underline;\">indirect costs<\/span> will add to the immense calculations.<\/p>\n<p>Depending on the size and type of <strong>commercial jobs<\/strong> a contractor performs, a <a href=\"https:\/\/www.foundationsoft.com\/software\/job-costing\/\">flexible job cost system<\/a> can be a great tool for any construction company.<\/p>\n<p>A job cost structure can allocate all costs, including actual overhead expenses, by specific costs (labor, equipment, subcontract), by job revenue, or by general ledger account.<\/p>\n<p>One of the many benefits of construction accounting software is that it can help you build your own custom <strong>job cost structure<\/strong> \u2014 all <a href=\"https:\/\/www.foundationsoft.com\/learn\/jobs-phases-cost-codes-and-cost-classes-in-construction\/\">phases<\/a> and codes will align with the layout of your company.<\/p>\n<p>A <strong>construction accounting solution <\/strong>will offer \u201cindirect costs\u201d as an option in the system and automatically calculate these expenses as they run job cost reports for each project.<\/p>\n<p>As a bonus, the overhead labels can be saved and applied every time as opposed to reentry before each report is run.<\/p>\n<p>Regardless of which method a contractor chooses, <a href=\"https:\/\/www.foundationsoft.com\/software\/\">accounting software<\/a> can usually offer both \u201cbefore\u201d and \u201cafter\u201d reports to help a contractor see the effect that overhead has on the <strong>bottom line<\/strong>.<\/p>\n<p>The software can also show the results for each job\u2019s profitability as well as for the company as a whole.<\/p>\n<a target=\"_blank\" href=\"\/job-costing-ultimate-guide\/\" class=\"blog-cta-image\"><img decoding=\"async\" src=\"\/wp-content\/uploads\/2024\/03\/FSL-blog-post-ad-ultimate-guide.png\" alt=\"UG to Job Costing\" title=\"UG to Job Costing\"><\/a>\n<h2><span class=\"ez-toc-section\" id=\"Monitoring_Your_Overhead_With_FOUNDATION%C2%AE\"><\/span><strong>Monitoring Your Overhead With FOUNDATION\u00ae<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The real payoff in performing overhead allocation is the result. Contractors who use and understand overhead costs have a more accurate understanding of all costs.<\/p>\n<p>They\u2019re an important piece in the puzzle that, when put together, shows the real bottom line.<\/p>\n<p>By implementing construction accounting software, like <a href=\"https:\/\/www.foundationsoft.com\/\">FOUNDATION<\/a>, to a company\u2019s back-office processes will reduce the strain of indirect cost tracking because the system will do it for you.<\/p>\n<p>FOUNDATION specifically\u00a0<span style=\"box-sizing: border-box; margin: 0px; padding: 0px;\">offers <a href=\"https:\/\/www.foundationsoft.com\/learn\/making-the-most-of-construction-job-cost-sheets\/\">job cost\u00a0tracking<\/a>, custom budgeting, and cost reporting to ensure that construction overhead allocations are<\/span>\u00a0always considered in every <strong>budget<\/strong> and report.<\/p>\n<p>Talk to a specialist today to learn <a href=\"https:\/\/www.foundationsoft.com\/#schedule-a-live-demo\">more<\/a>!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Overhead allocation is one of the most challenging concepts that contractors face when running their businesses, but it\u2019s an essential task in determining a company\u2019s profitability. As detailed by Buildertrend, overhead is, in fact, one of only two factors that impact your profit\u00a0margin (the other being markup).\u00a0In other words, to complete a project in the black, construction professionals need to &#8230; <\/p>\n<div><a href=\"https:\/\/www.foundationsoft.com\/learn\/conquering-construction-overhead-allocation\/\" class=\"more-link\">Read More<\/a><\/div>\n","protected":false},"author":60,"featured_media":22160,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_searchwp_excluded":"","inline_featured_image":false,"footnotes":""},"categories":[41],"tags":[],"class_list":["post-22154","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog-category"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Conquering Construction Overhead Allocation<\/title>\n<meta name=\"description\" content=\"Master overhead allocation in construction with expert tips on tracking indirect costs, choosing the right allocation method, and leveraging accounting software for accurate job costing and improved profitability. 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