Dual Rate Overhead Allocation

From the author of McGraw-Hill books’ “The Construction MBA” and “Managing a Construction Firm on Just 24 Hours a Day” comes a powerful app: The Construction Dual Rate Overhead Allocation Calculator. It is used in the construction industry by self-performing contractors as a costing equation for:

1) bidding a project,
2) costing an existing project or
3) allocating corporate overhead to multiple divisions of construction work.
It relies on banking information, regression analysis, and an accurate yearly overhead budget among other factors.

It is a highly accurate method. It produces two rates,
1) Labor / Equipment
2) Material / Subcontract.
This equation produces a percentage allocation of each class of cost. This is the cost of overhead to manage those direct costs.

Chip Greene of Greene and Associates – Mechanical and Plumbing Contractors.

“In specialty contracting trades, the biggest risk we face is labor. The dual rate overhead calculation determines the overhead required for the risk being assumed by the contractor with labor moving this calculation up or down. What it does for us is gives us the knowledge to know that on any given project our overhead is "X" and that is the figure we must have to pay our bills.

We have used this process for over 20 years. I recommend this to any trade contractor as a must for a successfully profitable business.”

From a practical perspective, one has to know the total cost of the job including the cost to manage it to know the breakeven number. He or she can look at the project before bidding it in several ways: breakeven, ROI, labor hours, competitor’s bid history etc. However, knowing the breakeven cost of the job is a primary step to arrive at a reasonable proposal price.

The method is only as accurate as the information inputted. The contractor has to correctly project yearly overhead and direct cost expenses. Once determined, the contractor has “clarity of costs” which provides the best data when making bidding or management decisions.