If your jobs consistently feel less profitable than your numbers suggest, the answer probably isn’t in the field. It’s in how your costs are being tracked—or not tracked.
Indirect costs are one of the most misunderstood areas of construction accounting. When they’re not properly identified, allocated, and reported, they create a distorted picture of job profitability that leads to bad bids, bad decisions, and a slow, invisible drain on your margins.
Here’s what every construction company owner needs to understand about indirect costs, equipment, and overhead—and what to do about it.
What Are Indirect Costs—and Why Do They Matter?
Indirect costs are any costs tied to your jobs that can’t be directly assigned to a specific job at the time they’re incurred. Think cell phones, owned equipment, vehicle usage, and general liability insurance. These costs exist because you have jobs—but when you enter the payable, it doesn’t go to a job. It just sits.
A useful test: would this cost exist if you had no jobs? If the answer is no, it belongs on the jobs. If you’re not allocating it back, your job margins are artificially inflated—and you’re making decisions based on numbers that aren’t real.
“If you’re not looking at [indirect costs] properly, you might think you’re more profitable than you are.” — Kathe Barrington, CPA
Overhead vs. G&A: Know the Difference
Most contractors lump everything together as “overhead.” But within overhead there are two very different buckets, and confusing them is one of the most common and costly mistakes in construction accounting.
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- Indirect costs — costs that exist because of your jobs and should be allocated back to them: equipment usage, safety expense, general liability insurance, cell phones, vehicle costs
- G&A (General & Administrative) — true overhead that would exist even if you had no jobs: bank fees, office rent, utilities, dues and subscriptions
The most common problem: indirect costs buried inside G&A. When that happens, your jobs look more profitable than they are, your G&A ratio balloons, and you lose the ability to accurately assess what it truly costs to complete work.
This matters beyond your own P&L. Banks and bonding companies scrutinize your G&A as a percentage of revenue. If it’s artificially high because indirect costs are hiding inside it, that signals financial risk—especially when revenue softens and that percentage spikes even higher.
Equipment: The Biggest Indirect Cost Most Contractors Mistrack
For companies with owned equipment, this is where the largest indirect cost leakage typically occurs—and where discipline pays off the most.
The right approach is to cost equipment to jobs using market rental rates: what you’d pay PAPA, Sunbelt, or United Rentals for that same piece of equipment. This is typically processed through payroll and gives you a real, defensible cost basis for every job.
Where contractors commonly go wrong:
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- Getting lazy with usage tracking and not logging time accurately
- Charging a job for equipment that’s parked on the site for storage, not because the job actually needs it
- Treating owned equipment as a liquid asset—assuming it can always be sold if things get tight
That last point carries serious risk. When the economy turns, everyone is trying to sell equipment at the same time and nobody is buying. That dynamic contributed to the failure of many heavy equipment contractors in 2008. Equipment is an investment—but it is not a safety net.
“The times you’re going to have to sell [equipment] is probably when the economy is not doing well and everybody’s trying to sell and nobody’s buying.” — Kathe Barrington, CPA
Beyond the buy/sell question, underutilized equipment is an ongoing cost that doesn’t get offset by job revenue. Tracking usage honestly is what tells you whether a piece of equipment is earning its keep.
Chart of Accounts: The Foundation Everything Else Depends On
A disorganized chart of accounts doesn’t just create accounting headaches—it corrupts your data at the source. Every report, every job cost analysis, every margin calculation flows from how your accounts are structured. Get it wrong and you’re building on a cracked foundation.
What a clean construction chart of accounts looks like:
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- Direct costs grouped together in a consistent sequence
- Indirect costs in their own clearly defined section with specific cost codes for equipment usage, insurance allocations, and other indirect items
- G&A kept separate and lean—true overhead only
- Concise: not eight pages of accounts that nobody can navigate
When costs are scattered or indirect items are mixed into G&A, two things happen. First, your job profitability reports don’t reflect reality. Second, your estimators are pulling historical job data that’s incomplete—which means their bids are built on a false floor.
Why Estimating and Accounting Need to Speak the Same Language
Project managers are usually looped into accounting conversations. Estimators rarely are. That’s a gap that costs money.
If indirect costs aren’t being properly coded to jobs, your historical cost data is incomplete. An estimator looking at past jobs to price similar future work is missing those hidden costs—which means bids come in too tight, margins get squeezed, and the problem compounds with every job.
As a company grows and the owner steps back from day-to-day job involvement, the only way to assess performance accurately is through the numbers. If the numbers aren’t built on a complete cost picture, the whole system breaks down.
“When you’re small, you have a good feel for the jobs. But when you get to a certain point, you’re not involved in those jobs anymore. If you don’t have these things set up, you’re going to get lost.” — Kathe Barrington, CPA
How to Know If Your Overhead Allocation Is Fair Across Jobs
Not all indirect costs should be allocated the same way. The method you use should reflect how each category of cost is actually consumed:
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- Equipment costs — allocated by actual usage
- Safety expenses and similar costs — allocated by labor hours
- Other indirect costs — allocated by whichever ratio best reflects real consumption
When allocation is done well, every project manager can see exactly what their job is carrying and why. When it’s done poorly—for example, splitting equipment costs evenly across all jobs regardless of whether those jobs used equipment—you get legitimate pushback and, more importantly, inaccurate data.
The fairness of your allocation method also directly affects how accurately you can evaluate PM performance. A job that looks unprofitable because it’s carrying overhead it didn’t generate isn’t giving you a real read on that project manager’s work.
“Every Dollar Needs a Home and a Purpose”
This is the principle that ties all of it together. In construction, where nearly every cost is tied to jobs and every job is different, you cannot manage what you cannot see.
When you know where every dollar is going, you can:
- Understand your true job margins and bid more aggressively with confidence
- Identify which project types and project managers are genuinely profitable
- Cut costs quickly when times get tight, because you know exactly where to look
- Present clean, accurate financials to banks and bonding companies
- Make strategic decisions—which work to go after, which to avoid—based on real data
When you don’t know, you’re always reacting. You need extra cushion in every bid. You can’t move fast enough when revenue drops. And the decisions you’re making are based on a picture that isn’t complete.
Three Things to Do Right Now
- Identify and allocate your true indirect costs. Review every item currently sitting in G&A and ask the question: would this cost exist if I had no jobs? If not, it belongs on the jobs. Start moving those costs where they belong and tracking them properly.
- Tighten your equipment tracking. If you own equipment, make sure it’s being costed to jobs at market rates, logged by actual usage, and assessed regularly for utilization. If a piece of equipment is costing more in repairs than it’s worth, or sitting unused, that’s a decision that needs to be made.
- Review these numbers monthly. Not quarterly. Not at year-end. Monthly, as part of your close process. Look at what’s being allocated, what’s sitting unallocated, and what the numbers are telling you about the health of your jobs and your overhead structure.
Want to go deeper on all of this?
Kathe Barrington, CPA joined Eric Anderton on the Construction Genius Podcast to walk through every one of these topics in detail—including real examples from her 20 years working with construction companies.
▶ Listen to the full conversation on Construction Genius
