Overhead Allocation, Indirect Costs & Equipment Costing

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Hello, and welcome. This is Super Structures General Contractors — a national general contractor headquartered in Powhatan, Virginia — here to help you and your clients build something that lasts. We're glad you're with us, and we look forward to connecting with you.

Here's one that matters more than its name lets on — Overhead Allocation, Indirect Costs & Equipment Costing. If you remember one thing, make it this: Know what's a job cost, what's an indirect cost, and what's company overhead — and charge equipment and labor burden to jobs at rates that reflect what they really cost. Do this right and your job margins mean what they say.

Not every cost lands cleanly on a job. How you handle the ones that don't decides whether job profit and company profit tell the same story.

Three layers of cost

1. Direct job cost — labor, material, subs, equipment, and other costs traceable to one job.
2. Indirect job cost — costs incurred for jobs collectively but not traceable to one: the equipment yard, small tools, the warehouse, field supervision that floats between jobs, safety program costs, vehicle fleet. These are allocated to jobs on a reasonable basis.
3. General and administrative (G&A) overhead — running the company: office rent, executive and office salaries, accounting, marketing, IT, insurance not charged to jobs, professional fees. Recovered through markup, not charged to jobs.

Labor burden

Wages are only part of labor cost. Burden adds payroll taxes (FICA, FUTA, SUTA), workers' compensation, general liability tied to payroll, health insurance, retirement, paid time off, training, and union fringes. Burden commonly adds 30 to 60 percent or more on top of wages depending on trade and state. Charge labor to jobs at a burdened rate — and reconcile the burden pool to actual costs quarterly so the rate stays right.

Equipment costing

Owned equipment costs money whether it works or not: depreciation, interest, insurance, taxes, storage (ownership costs) plus fuel, maintenance, repairs, tires (operating costs). Set an internal rental rate per hour or day for each class of equipment, charge jobs for the hours used, and credit an equipment cost pool. At year-end the pool should be close to zero; a large balance either way means the rates are off.

Going Deeper (Intermediate)

The allocation basis for indirect costs should follow cause: small tools often by direct labor dollars or hours; the equipment yard by equipment hours; floating supervision by hours actually spent. Document the method and apply it consistently, because owners on cost-plus contracts and government auditors will ask.

Equipment rate references exist — the EquipmentWatch (Blue Book) rental rates and the Army Corps of Engineers EP 1110-1-8 equipment ownership and operating expense schedule — and are commonly used for change orders and claims. Your internal rate should be based on your actual costs.

Advanced / Pro-Level

Pros run equipment as a profit center: each major unit has a cost history, a utilization rate, and a rent-versus-own analysis; underused equipment gets sold. They review burden rates by trade and by state because workers' comp rates differ enormously between a carpenter and a roofer, or between two states.

On federal cost-type contracts, the Federal Acquisition Regulation (FAR Part 31) defines what's allowable and how indirect rates are built and audited. Even on private work, that structure — direct, indirect pools with bases, and G&A — is the clearest model for a contractor's cost accounting.

Practice Challenge

Your carpenters are charged to jobs at $32/hour wages plus a 40% burden ($44.80). The year-end reconciliation shows the burden pool is $180,000 underabsorbed. What happened and what does it mean? (Answer: actual burden costs exceeded what was charged to jobs — workers' comp or health costs rose, or hours were lower than planned — so job costs were understated all year and job margins looked better than they were; raise the rate, book the true-up, and review whether the estimate's labor rate also needs to change.)

In Practice

A contractor who charges equipment to jobs at a real internal rate knows the excavator is losing money sitting in the yard. A contractor who expenses equipment at the company level thinks every sitework job is a winner and wonders why the company isn't.

Common Mistakes to Avoid

• Treating indirect job costs as G&A so jobs look more profitable than they are
• Labor burden rates that are never reconciled to actual costs
• No internal equipment rate, so owned equipment looks free
• Allocation methods that change from job to job

Takeaway: Know what's a job cost, what's an indirect cost, and what's company overhead — and charge equipment and labor burden to jobs at rates that reflect what they really cost.

Educational content — not accounting, tax, or legal advice. Accounting methods and tax rules depend on your entity, your size, and your contracts; work with a CPA who knows construction.