Overhead Allocation
Definition
Overhead allocation is the accounting method of spreading indirect costs like rent, insurance, and office salaries across jobs or departments so true profitability can be measured.
What Overhead Allocation Means for Your Business
What it means
Overhead does not disappear just because it cannot be tied to one job. Rent, dispatchers, software, liability insurance, they all cost money and need to be paid out of gross margin. Overhead allocation assigns those costs fairly across jobs.
Why it matters
Without allocation, every job looks more profitable than it is. Shops that skip it over-discount, under-price, and are always surprised when the bank account is thin at month end.
How contractors use it
Finance sets a monthly overhead total, divides it by billable hours or by department revenue, and loads the allocation into the job cost model. Some shops build it directly into their burdened labor rate.
Real-World Example
An HVAC company had $78,000 per month in overhead and 2,400 billable hours. A $32.50 per hour overhead allocation was added to every job costing estimate, revealing that flat-fee tune-ups at $89 were losing $4.10 each.
Related Terms
Net Margin
Net margin is the percentage of revenue that remains as profit after all operating expenses, taxes, and interest are paid.
Gross Margin
Gross margin is revenue minus the direct cost of labor and materials, expressed as a percentage of revenue.
Job Costing
Job costing is the practice of tracking every labor, material, and overhead cost tied to a specific job so you can measure its true profitability.
Labor Burden
Labor burden is the total cost of employing a technician beyond base wages, including payroll taxes, benefits, insurance, uniforms, and workers' compensation.
Burdened Labor Rate
Burdened labor rate is a technician's true hourly cost after adding payroll taxes, benefits, and other employment overhead on top of base wages.
Put This Into Practice with Free Software
Kaldr Tech handles overhead allocation and everything else you need to run your shop. $0/month, 3.5% + 30¢ per transaction.