construction accounting software upgrade
28 March 2019

How to Allocate Construction Overhead in FOUNDATION®

Accurately allocating overhead expenses can be difficult. Even after you’ve figured out what your overhead is and how it should be allocated across your jobs, setting it up to calculate correctly can be a challenge if you’re not prepared with the right tools. But with dedicated construction accounting software, you can save time and keep your overhead from getting you in over yours.

FOUNDATION offers three standard ways to allocate and track your overhead, each through a different module to fit your exact needs:

  1. At a flat dollar amount per labor hour through the Payroll Module
  2. As percentages of job expense or income or a flat dollar amount per labor hour through the Job Costing Module
  3. Or as a proportional rate across jobs through the General Ledger Module.

Overhead Allocation in the Payroll Module

Allocating overhead through FOUNDATION’s Payroll Module can be as simple as a one-step process. With minimal setup, you can start allocating overhead at a flat dollar amount for each labor hour that you process. FOUNDATION accomplishes this with what it calls “extra burden” because it accounts for additional costs on top of traditional labor burden like payroll taxes and benefits.

You can enter a customized name for your overhead that will appear on reports and set the flat dollar amount that should be allocated for each labor hour worked. If you want to post overhead to the general ledger or job cost to a particular cost code or cost class, FOUNDATION enables you to assign G/L accounts and a cost class or cost code directly to your overhead. If you’re unsure whether you should post to the G/L or where you should be tracking your overhead cost, you may want to consult with your construction CPA.

After setting overhead as a payroll burden, you can start generating it right away using the same flat dollar amount across your company for every labor hour you enter through payroll, or you can attach the overhead extra burden entry to specific employees, jobs, departments or even cost codes for a more customized allocation. You can also override the original flat dollar amount or choose to exclude it entirely from these areas.

Posting Overhead Allocation With Payroll

Once you have your overhead customized to your liking, generating it is as easy as running a normal payroll.

After you enter hours on a timecard and run your payroll, overhead will automatically generate at the flat dollar amount that you set for every eligible labor hour. Now, every time you process labor hours for an employee, you can sit back and relax as your overhead allocates itself.

While using the Payroll Module is a great solution if you base all of your overhead expenses strictly on labor hours, some contractors may want to use other methods of allocation. For example, what if overhead should be allocated by total job cost or job income? For this type of allocation, FOUNDATION uses the Job Costing Module.

Overhead Allocation in the Job Costing Module

Allocating overhead through the Job Costing Module in FOUNDATION involves a few steps but offers a great amount of customization, putting you in direct control of how your overhead is assigned. Before beginning to work with overhead through the Job Costing Module, you’ll first need to know how you want to allocate it. Should it be based on actual job costs? Total sales? A fixed amount by labor hours? Your construction CPA can help you figure this out if you’re unsure.

In the Job Costing Module, you can designate the overhead allocation method that works best for your business. You can choose to have all overhead post to the same phase, cost code and cost class or track overhead at these levels individually on a job-by-job basis. FOUNDATION also allows you to assign G/L accounts and a journal code of your choice when posting your overhead to the G/L for easy visibility on your reports. By limiting a report to show only your overhead journal code, you can clearly see in just a few seconds how much overhead you’ve posted across all jobs.

At each level in the Job Costing Module, you can modify or exclude overhead allocation rates. You can even set individual rates in each of these areas. These will let you get more specific with your overhead the further down the chain you go. And it gives you a fully customized allocation setup.

Setting Overhead Allocation by Job

For example, let’s say a demolition company is looking to set up their overhead allocation through the Job Costing Module. They have a default allocation rate set up across all jobs, but the owner decides that one of their jobs should use a 30% overhead rate for all transactions posted to it. To get this to calculate, all that they would have to do is pull up the record for that job and enter a 30% rate.

Now imagine the same company created another job just to track their office wages separately from their direct costs. Let’s say the owner decides that all of the office wages should be allocated as overhead. In this case, they would pull up the record for the office job and set the overhead rate to 100%. All payroll checks posted to this job now allocate 100% overhead.

Setting Overhead Allocation by Cost Code

You can also assign overhead at the cost code or cost class (sometimes called “cost type”) levels. The rate entered here will be an exception to what you have set at the job level. Any rate entered for a cost class will also create an exception to rates set at the cost code level.

For example, the demolition company calculates that their wrecking ball’s maintenance and insurance account for more overhead than their labor. The owner decides that transactions tied to the heavy equipment cost code, like the wrecking ball, should allocate at 50%. They pull up the cost code record for heavy equipment and input that rate. Now, transactions assigned to the heavy equipment cost code will allocate at 50%. Meanwhile, entries posted to any other cost codes for the job will still allocate at 30%.

Posting Overhead Allocation With Job Costing

Unlike the automatic overhead posting through Payroll, posting overhead through Job Costing is a manual process. You may want to post overhead weekly, quarterly, yearly or anytime in between. FOUNDATION will only gather overhead accumulated from all eligible transactions between the date ranges that you enter. You can then select the exact date that you want your overhead to post to your G/L or job costing.

The Job Costing Module offers in-depth customization for overhead allocation at each level. However, some contractors just want to proportionally assign their overhead across their jobs. FOUNDATION lets you do this through the General Ledger Module.

Overhead Allocation in the General Ledger

The General Ledger Module in FOUNDATION is your go-to if you’re looking to proportionally allocate your overhead. It designates each relevant G/L account as income, job expense or overhead expense accounts. As a result, FOUNDATION tracks all transaction histories posted to these accounts to allocate your overhead expenses. You can also add overhead weight factors — basically, additional percentage multipliers — to your accounts. These allow posted transactions to impact overhead at a higher or lower rate.

Posting Overhead Allocation With the General Ledger

After you set these accounts, FOUNDATION will take all income or expense transactions posted to them and group these by job. For each account, FOUNDATION multiplies the total of all job transactions by the overhead weight factor. The result is a total cost for the job. FOUNDATION divides this total cost for the individual job by the total cost for all jobs. That gives you a percentage of how much overhead each job is creating. Once you verify your overhead allocation, you can then post it to update your G/L with a journal entry. This one entry debits and credits the accounts of your choosing.

By allocating your overhead through the G/L, you can proportionally distribute these expenses across all jobs from general ledger transactions. This allows you to establish a fair allocation for those costs that are essential to the running of the business — like rent or utilities — but can’t be directly attributed to any one particular job.

Conclusion

FOUNDATION offers several different ways for you to allocate your overhead expenses. Whether as a percentage of your income, expenses or a flat dollar rate, you can start tracking these expenses more accurately with just a bit of initial setup.

Have a more complicated setup that you want to use to allocate overhead? No problem! FOUNDATION allows you to mix-and-match between the methods listed above to accommodate even the most complex overhead allocations. Check out a free demo to get a more detailed look at all FOUNDATION® construction accounting software can offer you.

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