In construction accounting, we split costs into two buckets: direct and indirect.
Direct costs are the easy ones. They're the expenses you can point at and say, "That went to the Johnson project." Your lumber. Your concrete. The framing crew's wages. The electrical sub you hired. The excavator you rented specifically for that site.
These costs are straightforward to track because they literally show up at the job site. When you're doing job costing, direct costs are the low-hanging fruit.
Indirect costs—also called overhead—are where things get interesting. These are the costs that keep your business running but don't tie neatly to any single project:
- Your office rent and utilities
- Your project manager's salary (when they're juggling six jobs at once)
- Fuel for the fleet
- Insurance and bonding
- That project management software subscription you're paying for
- Your estimator's time
Here's the thing: these costs are just as real as the rebar on your job site. But because they don't have a project name attached, most contractors treat them like some abstract tax that gets dealt with "at the end of the year."
That's a problem.
Why You Need to Job Cost Your Indirect Costs
I get it. Allocating overhead to jobs feels like extra work. It's easier to just look at direct costs, see a healthy margin, and move on.
But here's what happens when you don't allocate indirect costs:
Your profitability reports are lying to you. That job you thought made 18% margin? Once you factor in the overhead it consumed, it might have made 6%. Or it might have lost money. You won't know until it's too late to do anything about it.
You're underbidding work. If your estimates only account for direct costs, you're essentially hoping that overhead "works itself out." It doesn't. You're leaving money on the table—or worse, paying to do work for someone else.
You can't identify your problem projects. Some jobs eat overhead for breakfast. The ones with complicated permitting. The ones with owners who call every day. The ones an hour outside your normal service area. Without allocating overhead, all your jobs look the same on paper, even when some are dragging down your entire operation.
Your bonding company cares. If you're going after larger projects, your surety is going to look at your financials. Proper job costing—including overhead allocation—signals that you actually understand your numbers. That matters when you're trying to increase your bonding capacity.
How to Actually Do This
There's no perfect method for allocating overhead. The right approach depends on how your business operates. But here are the most common methods, and when each one makes sense:
Direct Labor Cost Method
Take your total indirect costs and spread them across jobs based on each job's share of total direct labor dollars.
Best for: Labor-heavy contractors where labor is your primary cost driver. Think concrete, masonry, framing.
Direct Labor Hours Method
Similar concept, but you're using hours instead of dollars.This can be more accurate if you have significant wage variation across crews.
Best for: Contractors with varied labor rates who want a more precise allocation.
Material Cost Method
Allocate overhead proportionally to material costs on each job.
Best for: Material-intensive work where materials drive a lot of overhead activity—like coordinating deliveries, storage, and handling.
Total Direct Cost Method
Spread overhead based on each job's total direct costs (labor + materials + equipment). This is a balanced approach that accounts for multiple cost drivers.
Best for: General contractors or firms with a mix of labor, material, and equipment costs.
Hybrid Approach
Different overhead categories get allocated using different bases. Equipment-related overhead might be allocated by equipment hours. Administrative overhead might go by labor cost.
Best for: Larger operations with complex cost structures who want maximum accuracy.
The Real Talk
Look, I've spent 15+ years in construction finance. I've seen the spreadsheets. And I can tell you that the contractors who actually understand their indirect costs—and allocate them properly—make better decisions.
They bid smarter. They know which project types actually make money (and which ones just feel profitable). They can have honest conversations with their teams about where the business is really at.
The ones who don't? They're often the ones scratching their heads in December wondering where all the cash went.
Job costing your overhead isn't sexy. It's not going to bethe highlight of your week. But it's the difference between thinking you're profitable and actually being profitable.
And in this industry, that difference matters.