May 1, 2026
Overhead allocation is the process of distributing indirect business costs (rent, admin salaries, insurance, vehicles, software) across individual jobs so that each job bears its proportional share of the total cost of running the business. Without overhead allocation, job-level gross margin calculations overstate true profitability.
Here is a question I ask in every diagnostic engagement: “When you look at your job margin, does it include overhead?” Nearly every time, the answer is no. The job margin they’re looking at shows revenue minus direct costs. Overhead sits in a separate bucket on the P&L and is never connected to individual jobs. This disconnect produces a fundamental misunderstanding of what each job actually costs.
A water mitigation job generates $12,000 in revenue with $5,400 in direct costs — 55% gross margin. But the company has $85,000/month in overhead across 25 jobs. That’s $3,400 in overhead per job. Subtract from the $6,600 gross profit and the actual job contribution is $3,200 — 27% net margin. Not 55%. And a $4,000 emergency service job at 58% gross margin generates $2,320 in gross profit minus $3,400 overhead = -$1,080. That job is losing money on a fully-allocated basis.
Divide total monthly overhead by number of jobs. $85,000 ÷ 25 jobs = $3,400 per job. Simple to implement, but doesn’t account for job size. Best for: companies at early stages of job costing who need any allocation model rather than none.
$85,000 ÷ $250,000 monthly revenue = 34% overhead rate. A $12,000 job carries $4,080; a $4,000 job carries $1,360. Proportional to job value. Best for: most restoration companies as a starting point.
$85,000 ÷ 2,800 field labor hours/month = $30.36 overhead per labor hour. Most accurate for companies where field labor time drives most overhead consumption. Requires accurate labor hour tracking by job.
Step 1: Calculate your total monthly overhead. Step 2: Choose your allocation method (revenue-proportional is the best starting point). Step 3: Apply the allocation to your job cost reports monthly. Step 4: Review fully-loaded job margins by job type — which service lines are profitable on a fully-loaded basis? Step 5: Act on the findings by repricing or declining work that can’t cover fully-allocated costs.
Gross margin is revenue minus direct job costs, expressed as a percentage of revenue. Net margin is revenue minus all costs (direct and overhead). Gross margin answers “what’s left after paying for the work?” Net margin answers “what’s left after paying for everything?”
Restoration companies typically run overhead at 25–35% of revenue. Below 20% is unusually lean (common in owner-operator businesses with minimal admin). Above 40% indicates overhead is growing faster than revenue.
Yes — at market replacement rate, not at actual owner compensation. If the owner pays themselves $180,000 but a qualified operations manager would cost $110,000, the overhead allocation should use $110,000. The difference is owner return on equity — a separate category.
This is exactly the finding overhead allocation is designed to produce. The choices are: reprice (raise rates to cover allocation), reduce (do fewer of these jobs), or restructure (reduce the overhead that makes them uneconomic).
Mike McCabe is The Profit Detective — a 36-year restoration industry veteran and Fractional Operations Manager at Floodlight Consulting Group.
Most engagements pay for themselves within the first week.