{"id":7925,"date":"2017-08-14T11:59:00","date_gmt":"2017-08-14T15:59:00","guid":{"rendered":"https:\/\/foundationsoft.com\/?p=7925"},"modified":"2025-05-05T09:44:03","modified_gmt":"2025-05-05T13:44:03","slug":"what-is-overhead-allocation","status":"publish","type":"post","link":"https:\/\/www.foundationsoft.com\/learn\/what-is-overhead-allocation\/","title":{"rendered":"What Is Overhead Allocation? Why Your Jobs Should Take on Additional Costs"},"content":{"rendered":"<p><strong>Overhead allocation<\/strong> <strong>in construction<\/strong> is a way to share costs across multiple jobs. Why on earth would you do that?<\/p>\n<p>Simple: these are the costs your projects share responsibility for <em>anyway<\/em> \u2014 they\u2019re the costs you\u2019re already paying but can&#8217;t easily charge directly to a single construction project. Instead, they\u2019re \u201cindirect costs.\u201d And if indirect costs <em>aren\u2019t<\/em> tracked properly, it can give you a false sense of job performance.<\/p>\n<p>Properly tracking and allocating indirect costs is fundamental to understanding your true project performance and maintaining healthy profit margins in construction.<\/p>\n<p>How do you assign those costs fairly? That\u2019s the goal of <a href=\"https:\/\/www.foundationsoft.com\/learn\/overhead-allocation-methods\/\">overhead allocation<\/a>.<\/p>\n<p>The more accurately you can measure how overhead impacts each job\u2019s bottom line, the more accurate your picture of job performance can be. This can also mean better data for estimating, which in turn can protect your bottom line on future jobs.<\/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 class=\"PlaygroundEditorTheme__h2\" dir=\"ltr\"><span class=\"ez-toc-section\" id=\"Key_Takeaways_for_Construction_Overhead_Allocation\"><\/span>Key Takeaways for Construction Overhead Allocation<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul class=\"PlaygroundEditorTheme__ul\">\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"1\"><b><strong class=\"PlaygroundEditorTheme__textBold\">Strategic overhead allocation<\/strong><\/b> is essential for construction businesses to accurately measure true project profitability and prevent the common industry problem of profit fade.<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"2\"><b><strong class=\"PlaygroundEditorTheme__textBold\">Indirect costs<\/strong><\/b> require different allocation methods depending on their nature \u2013 equipment-related indirect costs might be allocated based on usage hours, while labor-related indirect costs could be distributed based on direct labor dollars.<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"3\"><b><strong class=\"PlaygroundEditorTheme__textBold\">Construction-specific accounting software<\/strong><\/b> provides dedicated overhead allocation features that generic financial systems lack, allowing contractors to implement sophisticated allocation models tailored to their business structure.<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"4\"><b><strong class=\"PlaygroundEditorTheme__textBold\">Construction companies<\/strong><\/b> that master overhead allocation gain competitive advantages through more accurate estimating, better resource allocation, and data-driven insights about which project types deliver the highest margins.<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"5\">Proper <b><strong class=\"PlaygroundEditorTheme__textBold\">allocation of indirect costs<\/strong><\/b> enables construction managers to make informed decisions about equipment investments, labor resource planning, and which market segments offer the best return on overhead expenses.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"What_Is_Overhead\"><\/span>What Is Overhead?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><strong>Overhead is typically a broad category of costs that aren\u2019t caused by any single construction projec<\/strong>t. In broad strokes, you\u2019ll sometimes hear about two kinds of \u201coverhead costs\u201d<a title=\"If you do government contract work, you might instead hear that 'indirect costs' need to be pooled into 'overhead' and G&amp;A. If you have questions, be sure to talk to your CPA.\" href=\"#_note\" name=\"_note\">[*]<\/a> \u2014<\/p>\n<ol>\n<li>indirect costs<\/li>\n<li>general and administrative (G&amp;A) costs<\/li>\n<\/ol>\n<p>One way you can think about the difference is whether the costs are related to the activity of your projects.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Indirect_Costs\"><\/span>Indirect Costs<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Indirect costs are indirect expenses that relate to your job activity. Unlike a <em>direct cost<\/em>, though, an indirect cost is either:<\/p>\n<ul class=\"checked\">\n<li>tied to multiple jobs or<\/li>\n<li>necessarily difficult to tie to just one job.<\/li>\n<\/ul>\n<p>Let\u2019s say Build-It Construction uses ten tons of gravel on Job 110 \u2014 if it wasn\u2019t for that one project, the cost wouldn\u2019t exist, right? So that\u2019s pretty clearly a <em>direct<\/em> cost to that job.<\/p>\n<p>But let\u2019s also say they use a dozer to lay that gravel. Of course it wouldn\u2019t be fair for Job 110 to shoulder all the expenses for that piece of <strong>construction equipment like a direct cost<\/strong>.<\/p>\n<p>Instead, every project that uses the dozer shares responsibility for its operating costs, including oil, service work, equipment maintenance and even <i><em class=\"PlaygroundEditorTheme__textItalic\">burdened labor cost<\/em><\/i> if an operator is involved, making these classic examples of <i><em class=\"PlaygroundEditorTheme__textItalic\">indirect costs<\/em><\/i> in construction job costing.<\/p>\n<p>We can look at another example.<\/p>\n<p>They schedule an engineer for six hours on Job 110 and three hours on Job 210. Again, if Job 110 didn\u2019t exist, six hours never go to payroll \u2014 they\u2019re a <strong>direct cost<\/strong> to Job 110. Whichever job the engineer works on, however, Build-It Construction still has to pay health care premiums for that engineer. They might treat those indirect costs as overhead as well.<\/p>\n<p>In short, several projects are responsible for the expense, and several projects benefit from it, but not <em>all <\/em>jobs necessarily relate to it equally.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"G_A_Costs\"><\/span>G&amp;A Costs<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>In contrast, a G&amp;A cost might be one that applies to the <strong>general running of the business<\/strong>. All projects probably benefit from it more or less equally. Examples include:<\/p>\n<ul>\n<li>Office rent and utilities<\/li>\n<li>Administrative salaries<\/li>\n<li>Office Supplies<\/li>\n<li>Advertising<\/li>\n<li>General liability insurance cost<\/li>\n<li>And a lot more!<\/li>\n<\/ul>\n<p>G&amp;A supports your ability to take on and bill jobs \u2014 but in one sense, they\u2019re relatively stable despite fluctuation in your job progress and labor. If you\u2019d still have the expense even if you had <em>no <\/em>active jobs (rent, for example), that\u2019s likely G&amp;A cost.<\/p>\n<p>In general, showing a connection between one construction project and its effect on a G&amp;A expense is much harder to make. Imagine making the case that one job resulted in a 3% increase in your copier toner use!<\/p>\n<p>That\u2019s why G&amp;A can sometimes be handled differently from allocated overhead. Your jobs might have different levels of responsibility for overhead, but your jobs aren\u2019t <em>really<\/em> responsible for G&amp;A. Still, you might choose some fair way to disburse G&amp;A across your jobs just so the reality of those costs are factored in alongside your project revenues.<\/p>\n<p>Your <a href=\"\/construction-cpa\/\">construction CPA<\/a> will be able to help you figure out which costs are direct, which are indirect, and which are G&amp;A.<\/p>\n<p>They can also take you through whether and how they might want you to account for and allocate each of these differently.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_to_Allocate_Overhead\"><\/span>How to Allocate Overhead<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Because there are many options in the allocation of overhead, the first rule is to know what you don\u2019t know. A construction CPA can help you determine the best way to allocate your overhead costs. That also includes:<\/p>\n<ol>\n<li>What costs<\/li>\n<li>What method<\/li>\n<li>What technology<\/li>\n<\/ol>\n<p>These are also three basic steps to successful job costing.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"1_Gather_Your_Costs\"><\/span>1. Gather Your Costs<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>First, know what the costs are that you want to allocate. You can ask simply, \u201cWhat are the <em>real <\/em>costs of completing this job?\u201d Here\u2019s where thinking through both overhead and G&amp;A types of indirect costs for allocation might become helpful.<\/p>\n<p>In the example of the dozer above, Build-It Construction already knows several jobs are responsible for those <strong>equipment expenses<\/strong>: service costs, fluids, possibly depreciation, and maybe even their cloud equipment tracking software. They might also pool these with their other overhead costs, like <a href=\"\/software\/payroll\/\">labor burden<\/a>, or they might keep them in separate cost pools. That way, they can distribute <a href=\"\/software\/equipment\/\">equipment costs<\/a> more heavily to more equipment-intensive construction projects and distribute payroll costs more heavily to more labor-intensive jobs.<\/p>\n<p>You can already see how there\u2019s no single right answer for everyone. Our example company and their CPA can make overhead allocation fairly simple or highly nuanced, depending on the level of detail and accuracy they want to achieve.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"2_Select_Your_Method\"><\/span>2. Select Your Method<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><strong><em>Establishing a basis.<\/em><\/strong> Part of defining <em>what<\/em> cost pools you want to allocate to your jobs is also figuring out <em>how<\/em> you want to distribute them.<\/p>\n<p>Here are just a few options <strong>contractors might use as a basis for allocating overhead<\/strong>:<\/p>\n<ul class=\"checked\">\n<li>total direct job costs<\/li>\n<li>direct labor costs<\/li>\n<li>direct labor hours<\/li>\n<li>equipment costs<\/li>\n<\/ul>\n<p>Selecting a basis for indirect cost allocation should make sense for the type of cost and for your type of business.<\/p>\n<p>A labor-intensive roofing contractor probably shouldn\u2019t allocate their liability insurance based on truck usage. Similarly, imagine a job with a high proportion of your direct costs but relatively low labor; you could use <strong>total direct job costs to allocate overhead<\/strong>, but if that makes the project responsible for a large share of payroll overhead, that might not make the most sense.<\/p>\n<p>Along with selecting a basis for your allocation, you\u2019ll need to figure out how you\u2019re going to allocate costs:<\/p>\n<p><strong><em>Using a predetermined rate.<\/em><\/strong> For example, construction contractors can choose to estimate their overhead for each job using an established overhead rate. For example, you might calculate that your overhead for a job generally represents x% of revenue or y% of its direct labor costs. To allocate overhead, you\u2019d add that amount to your total job costs. While this tends to be a simpler method, it also tends to be less accurate.<\/p>\n<p><strong><em>Using a proportion among jobs. <\/em><\/strong>Alternatively, contractors can track each overhead cost in their G\/L and distribute them proportionally across all jobs. A simple example could assign 25% of your total overhead to a job representing 25% of your company\u2019s direct job costs. However, you can add finer-grain complexity by allocating only a set portion <em>from<\/em> each overhead <a href=\"\/software\/general-ledger\/\">G\/L account<\/a> or by allocating a greater or lesser proportion <em>to<\/em> certain G\/L accounts.<\/p>\n<div id=\"for-more-box\">\n<p><a class=\"gdlr-button medium\" href=\"\/learn\/overhead-allocation-methods\/\" target=\"_blank\"  style=\"color:#ffffff; background-color:#000000; border-color:#999999; \"  >Read more about overhead allocation methods \u00bb<\/a><\/p>\n<h3><span class=\"ez-toc-section\" id=\"3_Get_the_Technology_You_Need_for_Your_Overhead_Allocation_Process\"><\/span>3. Get the Technology You Need for Your Overhead Allocation Process<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>You hear it all the time: having the right tool is important \u2014 because it\u2019s true! Depending on the size of your business, <strong>spreadsheets simply may not be a realistic<\/strong>, <strong>long-term option<\/strong> for tracking and managing your overhead allocation.<\/p>\n<p>On the one hand, there\u2019s excellent generic accounting software that can work very well for small contractors. But if it isn\u2019t designed to allocate overhead to distinct jobs, you can be stuck doing work outside of the system. That increases the risk of entry error and calculation mistakes. Plus, it means your financial data is stored in more than one place.<\/p>\n<p><a href=\"https:\/\/www.foundationsoft.com\/\">Construction accounting software<\/a> can give you multiple ways to perform indirect cost allocation. Finding the right fit means, in part, making sure that it\u2019s able to facilitate the method you and your CPA determine is most beneficial for you. So flexibility is a factor.<\/p>\n<p>When you begin the search for construction accounting software, talk with vendors one-on-one. Ask them whether their application can help you with your <strong>overhead allocation process<\/strong>.<\/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<h2 class=\"PlaygroundEditorTheme__h2\" dir=\"ltr\"><span class=\"ez-toc-section\" id=\"Master_Overhead_Allocation_to_Build_Construction_Profits\"><\/span><b><strong class=\"PlaygroundEditorTheme__textBold\">Master Overhead Allocation to Build Construction Profits<\/strong><\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Not every accounting software will be a fit for everyone. Implementing the right construction accounting software is crucial for contractors who want to master overhead allocation and gain complete visibility into their true project costs.<\/p>\n<p>See what FOUNDATION construction accounting software can do in a <a href=\"#watch-demo-video\"><strong>self-guided product tour<\/strong><\/a>, and connect with us over a <a href=\"#schedule-a-live-demo\"><strong>live demo<\/strong><\/a> so we can talk about your overhead allocation needs.<\/p>\n<\/div>\n<p><a class=\"gdlr-button medium without-border\" href=\"\/#watch-demo-video\" target=\"_blank\"  style=\"color:#ffffff; background-color:#000000; \"  >Watch an online demo<\/a><\/p>\n<hr align=\"left\" size=\"1\" width=\"33%\" \/>\n<div id=\"_note\">\n<p><a title=\"\" href=\"#_note\" name=\"_note\">[*]<\/a>\u00a0<em>If you do government contract work, you might instead hear that &#8220;indirect costs&#8221; need to be pooled into &#8220;overhead costs&#8221; and G&amp;A. If you have questions, be sure to talk<\/em><em>\u00a0to your CPA.<\/em><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Overhead allocation in construction is a way to share costs across multiple jobs. But why on earth would you do that?<\/p>\n","protected":false},"author":17,"featured_media":10783,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_searchwp_excluded":"","inline_featured_image":false,"footnotes":""},"categories":[9,16],"tags":[11,14],"class_list":["post-7925","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles","category-reporting-bookkeeping","tag-construction-reporting","tag-job-costing"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What Is Overhead Allocation? 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