Definition

Overhead allocation is the process of distributing indirect company costs (office rent, insurance, admin salaries, software, etc.) to jobs so that each job carries a fair share. Methods include percentage of direct cost, percentage of revenue, labor-hour rate, or activity-based allocation.

Why It Matters

If overhead is not allocated, job margins look higher than they are because indirect costs are “invisible” on the job report. Allocating overhead gives a truer picture of job profitability and helps set markups that cover both direct cost and company overhead. It is especially important for contractors with significant fixed overhead.

Field Example

Monthly overhead is $15,000. Jobs this month have total direct cost of $100,000. Overhead is allocated at 15% of direct cost. Job A with $30,000 direct cost receives $4,500 overhead; Job B with $20,000 receives $3,000. Job profit is then calculated after allocated overhead for a more accurate margin.

Calculation / Formula (if applicable)

Common methods: (1) % of direct cost — Overhead rate = Total overhead ÷ Total direct cost; Job allocation = Job direct cost × rate. (2) % of labor — Overhead per labor dollar or per hour. (3) Activity-based — Allocate by driver (e.g., labor hours, revenue).

Software Application

Allow defining an overhead pool and allocation method (e.g., % of direct cost, % of labor). Periodically (e.g., monthly) calculate and post allocated overhead to each job. Report job cost and margin before and after overhead so users see both views.

Tooltip Version

Overhead allocation spreads company-wide indirect costs (office, admin, insurance) across jobs so each job’s profitability reflects its share of overhead.

Overhead Allocation