Two practical allocation methods
Per-job allocation is easy to maintain when jobs are broadly similar. Per-billable-hour allocation gives larger jobs more overhead when job size tracks labor time. Other drivers may fit your business better; consistency and a defensible connection to the work matter more than false precision.
Worked example: one month of overhead
If the same business expects 80 similar jobs, a simple per-job allocation would be $75. For a job mix that ranges from two hours to two weeks, the hourly method usually reflects consumption more closely.
Build loaded cost, then apply margin
If loaded cost is $2,280 after adding $180 of overhead and the target gross margin is 30%, the target price is $2,280 ÷ 0.70 = $3,257.14.
Avoid the two common allocation errors
- Understating capacity: dividing by every paid hour instead of realistic billable hours spreads overhead too thin.
- Double counting: do not place the same vehicle, insurance, tool, or labor-related expense in both direct cost and overhead without a deliberate reason.
- Using stale forecasts: compare expected jobs or hours with actual results and update the rate on a regular schedule.
Questions people ask
What counts as contractor overhead?
Overhead commonly includes recurring business costs that are not directly purchased for one job, such as office expense, software, general insurance, vehicles, tools, licensing, and nonbillable administration. Classification depends on your business and accounting method.
Should I allocate overhead per job or per labor hour?
Use a driver that reasonably follows how the business consumes resources. Per-job allocation is simple when jobs are similar. Per-billable-hour allocation often fits businesses with jobs of very different sizes.
Is overhead the same as profit?
No. Overhead repays the ongoing cost of operating the business. Profit is what remains after direct cost and overhead are covered.