Computing Unassignable Overhead

One of the most difficult, and misunderstood areas of construction cost tracking is unassignable overhead, often called “home office overhead” or “indirect costs”. Unassignable overhead is those costs, which are not directly charged to a project but are costs nonetheless. This overhead should be a component of every project cost and becomes especially important for changes or delays in the work.

To begin let’s look at some costs and determine if they are assignable or unassignable on an imaginary project called, “Tainted Food Market”, a supermarket our company is building.

Foundation – assignable
Superintendent works on site – assignable
Job site trailer - assignable
Temporary fencing to keep vandals and the public out – assignable
Project manager who works at home office but works only on this project – assignable
Telephone on site – assignable
Secretary at home office works on all projects – unassignable
Construction Manager works on various projects – unassignable
Home office rent - unassignable
Home office telephone – unassignable
Depreciation on company vehicles – unassignable
Depreciation on tools and equipment – unassignable
Insurance not for a specific job – unassignable

In general unassignable overhead is for those things, which are not easily attributable to a specific job. In the above list we see things like the construction manager, who works on several projects. This construction manager is a good example because he or she could, theoretically, keep a time card of how many hours were worked on each project and the cost could be charged to individual jobs. Although this would be possible, it would also be very complex and cumbersome and the normal practice is to put those costs like the construction manager, into unassignable overhead.

Tainted Food Market also had a project manager who worked in the home office, but worked only on the project. In this case the project manager could easily be an assignable direct expense. The determination of which costs are assignable and which costs are not is based upon both common sense and convenience. Costs such as job site superintendents, fencing and foundation are obviously assignable. Other costs, such as the secretary at the home office and home office rent are obviously unassignable. The middle area, those things like the construction manager, who could be assigned, but not easily, usually end up as unassignable costs for convenience.

The time to determine whether an expense type is assignable or unassignable is when your chart of accounts is set up. There should be subcategories (or sort codes) for both assignable or unassignable costs. This is the only way in which the information can be readily, and accurately, retrieved. Your accounting system becomes the basis on which your unassignable costs are retrieved. These costs are then compared to other numbers to obtain a ratio of unassignable costs to things like total billings, hard costs, and profit. Here is how it works:

Our company has the following for one fiscal year:

Total billings $10,000,000
Total Profit $1,000,000
Unassignable costs $500,000
Assignable costs $8,500,000

Percentage of total billings
The unassignable costs can be expressed in a percentage of total billings for a fiscal year. For example, if your company had billings of $10,000,000 and unassignable costs of $500,000 you would use the following formula:

500,000 / 10,000,000 = 5% of your total billings.

Or more simply put for every $1 which comes in 5 cents is the recovery of money already spent on unassignable overhead. This is a good measure of the efficiency of your organization in managing work.

Percentage of job costs
Unassignable costs are often compared to assignable or job costs. If your company has $500,000 in unassignable costs and assignable job costs of $8,500,000 the formula looks like this:

500,000 / 8,500,000 = 5.9% of job costs are unassignable overhead.

This is a very important number for your estimators to have. You can say that for every dollar you spend on a jobsite, you also must spend 5.9 cents for unassignable overhead. This number should be added in as a cost of building a project.

Percentage of profits
Unassignable costs can also be expressed as a percentage of profits. If your company had a profit of $1,000,000 for a fiscal year and the unassignable costs were $500,000 the formula would look like this:

500,000 / 1,000,000 = 50% of profit.

Or you could say that for each dollar of profit you make you must spend 50 cents in unassignable costs. This is a good measurement of the efficiency of your home office operation.

Computing the cost of delay
Knowing these numbers can help you compute the real impact of changes. Let’s assume that the Tainted Food Market had an owner caused delay of two months. During this time no work was done and the superintendent was put on another project. You can compute the cost of the fence and the trailer, but what about the costs of running your business while waiting for Tainted Food’s Home office to get their act together? You will still have staffing and expenses at the home office and, since Tainted Foods is a big project you can’t run out and take another job because Tainted Foods will suddenly get going again and you need to staff and run the project. Here’s how you do the math:

Tainted foods estimated job cost (no profit) $2,000,000

Time predicted to build 6 months

Delay time 2 months – which stretches your schedule to 8 months

First, lets see how many months of extra unassignable expense you have:

8 months – 6 months = 2 additional months of unassignable expense.

Next let’s determine what the cost of unassignable overhead on the project would have been per month by using some of the percentages we arrived at in previous calculations:

Last years job costs were $8,500,000 and the unassignable overhead was expense was $500,000 for the following math:

500,000 / 8,500,000 = 5.9% of job costs are unassignable overhead

So we can say that we would incur 5.9% of $2,000,000 (our predicted cost to build) in unassignable overhead expense in the six months we intended to take to build the Tainted Foods Market:

.059 X 2,000,000 = $118,000

To get our predicted cost per month we need to divide by six months as follows:

118,000 / 6 = $19,667 per month in unassignable overhead.

If we extend the job by two months and do no other work in its place we can say that we have incurred an additional two months of unassignable overhead on the project due to the owner’s failure to perform as promised. The additional expense to us is as follows:

2 X $19,667 = $39,334

In our change order we would ask for two months additional time, the actual costs we paid, such as trailer rental, plus $39,334 in unassignable overhead. Our percentages were based upon prior year accounting information and there is some inherent inaccuracy in this system, but it is the best and most reasonable way to make the computation. On larger projects, or on Federal projects, the contract managers for the owner often ask for unassignable expenses to be compared to actual billings for the time of the delay or extension. This is more difficult to retrieve because your accounting is in process for these costs while they are being retrieved. This method is more accurate, but also requires a lot more effort on the part of the contractor and more scrutiny by the owner so the simpler, prior year method is typically used.