Don't Ruin Your Margins on Small Jobs
Flat overhead allocations quietly punish your small jobs and let your bigger jobs off easy. If every job absorbs overhead the same amount — regardless of its size or how labor-intensive it is — you’re probably underpricing some work and overpricing other work without ever realizing it. It sounds like a small accounting detail, but it’s actually a margin problem.
What Counts as Overhead vs. Direct Job Cost
Direct job costs are anything you can trace to a specific job — on-site labor, material, equipment, and subcontractor costs, which should show up in your job costing. Overhead is operating costs necessary to put work in place, but that can’t be readily tied to any one job:
- General liability and equipment insurance
- Operational oversight salaries, such as a project manager or general superintendent
- Company-wide equipment yard and common storage facilities
- Company-wide safety program and personnel
Some of these costs occur in a gray area — a project manager who splits time across five jobs, for instance, could be tracked as a direct cost if their hours are reported by job, or treated as overhead if they aren’t. Either approach can work, but it needs to be applied consistently. If not, your job-level numbers stop being comparable to each other.
Why Flat Overhead Allocation Punishes Small Jobs — and Lets Big Jobs Off Easy
Many contractors allocate overhead as a flat dollar amount per job, or apply the same rough percentage of total costs to every job without checking whether that rate aligns with primary cost drivers. On the surface, that feels simple and fair. In practice, it can distort the picture at both ends.
Here’s an exaggerated example of what a flat allocation looks like: say your business allocates a flat $15,000 of overhead to every active job, regardless of size.
| Job | Contact Value | Flat Overhead Allocated | Overhead As % Of |
|---|---|---|---|
|
Job A (small) |
$180,000 |
$15,000 |
8.3% |
|
Job B (large) |
$1,200,000 |
$15,000 |
1.3% |
That same $15,000 is a real bite out of Job A’s margin — over 8% of its total revenue. On Job B, it barely registers. And it isn’t necessarily true that Job B needed less project management attention, less insurance, or less yard or safety support than Job A. Smaller jobs can be just as labor- and coordination-intensive as large ones — sometimes more so. A flat allocation ignores that entirely, which means your small jobs can be losing real margin to overhead, while your large jobs look more profitable than they actually are because they’re absorbing less overhead than they really use.
A Simple Allocation Method Tied to Labor Hours or Revenue
The fix isn’t complicated. Instead of a flat dollar amount or an arbitrary percentage, pick a cost basis that reflects how jobs actually consume overhead — typically total labor hours or, for a general contractor, subcontract costs — and calculate a consistent rate:
| Overhead Rate = Total Annual Overhead ÷ Total Labor Hours (or Total Direct Job Costs) |
|---|
Apply that same rate to every job, based on the labor hours or other cost driver each one actually uses. A job that requires more field labor and more coordination picks up a proportionally larger share of overhead. A job that moves quickly with a lean crew picks up less. Overhead tends to scale with how much of your business each job really needs, instead of being spread evenly regardless of how different two jobs actually are.
For labor-intensive contractors, labor hours tend to be the better basis, since overhead like project management and insurance usually tracks closer to labor effort than to other drivers. Revenue-based allocation can work well for equipment- or material-heavy work, where overhead tends to scale more with job size. Either basis is a significant improvement over a flat amount — what matters most is coding costs to jobs consistently, ideally as part of your regular weekly job costing, and revisiting the overhead rate itself at least once a year as your overhead costs and job mix change.
If you’ve never checked whether your overhead allocation method still makes sense across your current mix of job sizes, there’s a good chance some jobs are quietly subsidizing others. We’ll review your current allocation approach, job by job, and show you where the method may be distorting your real margins. Reach out to schedule an overhead allocation review.
Next in this series: “Verbal Change Orders Are How Contractors Lose Thousands” — once your costs are allocated correctly, undocumented scope changes are the next place margin quietly slips away. Read Blog Post 26.39.
