April 7, 2026
What is overhead allocation in restoration? Overhead allocation is the process of distributing indirect business costs — rent, admin salaries, insurance, vehicles, software — across individual jobs so 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 — labor, materials, equipment, subcontractors. 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 — and some dangerous business decisions as a result.
Imagine a water mitigation job that generates $12,000 in revenue with $5,400 in direct costs. The gross margin is 55% — strong by any measure. But the company has $85,000 per month in overhead and runs 25 jobs per month. That’s $3,400 in overhead per job.
Subtract overhead from the gross profit ($6,600) and the actual job contribution is $3,200 — a 27% net margin. Not 55%. 27%.
Now run the same analysis on a $4,000 emergency service job with a 58% gross margin:
This job is losing money on a fully-allocated basis. It generates gross profit but doesn’t cover its share of overhead. Without overhead allocation, the owner sees a 58% gross margin and thinks the job is profitable. With allocation, they see the truth.
Divide total monthly overhead by number of jobs. $85,000 ÷ 25 jobs = $3,400 per job.
Advantage: Simple and easy to implement immediately.
Disadvantage: Doesn’t account for job duration or size. A $4,000 emergency call gets the same overhead allocation as a $40,000 mitigation job.
Best for: Companies at early stages of job costing who need any allocation model rather than none.
Allocate overhead as a percentage of job revenue. $85,000 overhead ÷ $250,000 monthly revenue = 34% overhead rate. A $12,000 job carries $4,080 in overhead. A $4,000 job carries $1,360.
Advantage: Proportional to job value — larger jobs carry more overhead.
Disadvantage: Doesn’t account for job complexity or duration.
Best for: Most restoration companies as a strong starting point.
Allocate overhead based on field labor hours per job. $85,000 overhead ÷ 2,800 field labor hours/month = $30.36 overhead per labor hour. A job requiring 80 field hours carries $2,429 in overhead. A job requiring 200 hours carries $6,072.
Advantage: Most accurate for companies where field labor time drives most overhead consumption.
Disadvantage: Requires accurate labor hour tracking by job.
Best for: Companies with good labor hour tracking and significant variation in job size.
You don’t need a sophisticated accounting system to start. Here’s the five-step implementation:
In my 36 years of running diagnostics, overhead allocation produces three consistent findings:
Gross margin is revenue minus direct job costs, expressed as a percentage of revenue. Net margin is revenue minus all costs — direct and overhead — expressed as a percentage of revenue. 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 and requires immediate attention.
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 $70,000 difference is owner return on equity — a separate category.
Overhead allocation reveals the true minimum price for each job type. Pricing above the fully-allocated cost floor produces real profit. Pricing between direct cost and fully-allocated cost produces gross profit but consumes overhead without covering it — which only works if higher-margin jobs in the same period compensate.
This is exactly the finding overhead allocation is designed to produce. When fully-allocated analysis shows a job type is consistently margin-negative, 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. He has conducted overhead allocation audits for restoration companies across North America. Book a free diagnostic conversation.
Most engagements pay for themselves within the first week.