Contractor field notes
Allocate company overhead to a construction job
This calculator compares two methods of recovering annual overhead: as a percentage of annual direct costs, or as a cost per billable hour. It then applies each rate to the job inputs so you can choose a consistent allocation method.
Job overhead allocation formulas
Cost-based overhead rate = annual overhead ÷ annual direct costs. Hourly overhead rate = annual overhead ÷ annual billable hours. Multiply the selected rate by job direct costs or job billable hours.
Worked example
With $120,000 annual overhead, $600,000 annual direct costs, and 4,000 billable hours, the rates are 20% of direct cost and $30 per billable hour. A job with $25,000 direct costs and 150 billable hours receives $5,000 overhead by cost or $4,500 by hours. These are alternatives, not a combined $9,500 charge.
Common estimating pitfalls
- Use annual direct costs for this percentage, not annual revenue.
- Keep the chosen allocation method consistent with the rest of your estimate.
Frequently asked questions
Why do the two methods give different results?
A job’s share of company direct costs may differ from its share of company labor hours. Material-heavy and labor-heavy jobs can therefore recover different overhead amounts.
Should I add both overhead results to my price?
No. The results compare alternative allocation methods for the same company overhead.
What if expected billable hours change?
Update the annual hours estimate. Fewer billable hours increase the amount of overhead each hour needs to recover.