Data to Dollars: What Each Metric Means & How to Use It to Drive More Profits: Series #6 - Metric Two of “The Trifecta”: Overhead Allocation Comparison
When I first started working with builders on their financials, I’d walk into our meetings armed with accurate data, detailed reports, and carefully tracked metrics. I was confident and excited to share what I’d uncovered, knowing these numbers could transform their business.
But there was a problem: I might as well have been speaking another language. It became very clear very quickly that my clients didn’t just struggle to understand the reports—they didn’t know what the metrics meant, let alone what actions to take, if any.
By the time I explained the significance of the metric, I’d already lost their focus. And the worst part? We never got to the best part—the actionable insights that could actually drive their dollars to meet their goals!
Enter: The Data to Dollars Series and The Playbook for Builder Profitability! In this series, we’ve broken down the key metrics residential construction companies need to track, what they mean for your business, and—most importantly—what to do with them to drive profitability and growth. We’re currently taking every metric covered in the series and packaging them altogether into one Playbook especially for Builders. Armed with this Playbook, you’ll know exactly what to do when with what you find in your financial reports.
Let’s dive into this week’s metric and see how it can help you turn some data into dollars.
#6 - The Trifecta #2: Overhead Allocation Comparison
What is “The Trifecta” -
The next three metrics are of utmost importance for tracking the finances of your individual projects so they meet your overall business profitability criteria. Therefore, we have aptly named them “The Trifecta for Financial Project Management.”
The Trifecta —WIP Report Accuracy, Overhead Allocation Comparison, and Project Profitability—represents the three critical metrics every custom home builder needs to master for profitable and efficient financial project management.
Each metric offers a unique perspective:
WIP Reporting Accuracy compares a project’s actual costs incurred with its percentage completion and revenue recognized. WIP analyzes the Est vs Actuals, Change Orders & Revised Budgets, Committed Costs, and Estimated Cost to Completion with Estimated Gross Profit Margin to manage a job’s progress.
Overhead Allocation Comparison ensures operational costs are fully absorbed by your jobs.
Job Profitability shows whether individual projects are meeting financial expectations.
Together, they provide a 360-degree view of a project’s financial health, helping you identify inefficiencies, refine estimates, and drive better results.
With this in mind, let’s take a look at your Overhead Allocation Comparison-
What It Is -
Overhead Allocation Comparison is a metric that tracks how well your estimated overhead allocation aligns with your actual overhead costs applied to jobs.
In residential construction, we typically allocate a standard percentage of overhead to each project during the estimating process. This metric compares that estimated percentage to the actual percentage of overhead costs incurred during the project’s active life.
How we calculate it -
Here’s where we like to just simply say, “We have a spreadsheet for that.” In reality, with AI and technology as savvy as it is, it’s a bit more than a spreadsheet.
Basically, at regular periodic intervals, we take the actual overhead costs and allocate them to the active jobs during that period. These intervals stack one upon another for the duration of the project. At the end of the project, we take a look at the actual allocation vs the estimated overhead allocation. Think of this comparison like the budgeted vs actual analysis.
Project by project, we are able to use this information to align, re-align and stay aligned with the overhead allocation used during the estimating process.
Why We Track It -
This metric ensures you’re not under-allocating overhead to your projects, which can lead to unaccounted costs eating into your profits.
By tracking actual overhead allocation in real time and comparing it to your estimates, you gain valuable insights into whether your overhead recovery rate is sufficient to cover operational expenses.
Why You Need to Know It -
Tracking Overhead Allocation Comparison allows you to:
Identify Under-Allocated Costs: If your actual overhead percentage exceeds your estimated allocation, your jobs aren’t fully absorbing overhead costs.
Validate Estimating Accuracy: This comparison helps refine future estimates by ensuring your allocation rates are realistic.
Make Mid-Project Adjustments: Real-time tracking lets you adjust course during a project, rather than realizing discrepancies after it’s too late.
What the Overhead Allocation Comparison Tells You -
Good: Your actual overhead percentage aligns with or falls slightly below your estimated allocation, indicating that your projects are absorbing overhead costs as planned.
Bad: A significant gap between estimated and actual overhead percentages signals that your jobs aren’t covering overhead costs, potentially eroding your profitability.
Action Steps Based on The Overhead Allocation Comparison -
If Actual Overhead Aligns with Estimates:
Maintain consistency in your estimating and cost tracking processes.
Use this validation to build confidence in your pricing and operational efficiency.
If Actual Overhead Exceeds Estimates:
Reassess Your Allocation Rates: Adjust future estimates to reflect a more accurate percentage of overhead.
Identify Cost Drivers: Pinpoint which overhead expenses are higher than anticipated (e.g., administrative payroll, equipment maintenance) and find ways to control them.
Track Mid-Project Costs: Regularly update your overhead allocation to catch and address discrepancies early.
If Actual Overhead Falls Below Estimates:
Review Efficiency Gains: Are you overestimating costs, or have you achieved operational efficiencies that reduce overhead?
Refine Your Allocation Method: Avoid inflating estimates unnecessarily by fine-tuning your allocation process.
Our Method for Ensuring Overhead Allocation Accuracy
At Catalyst CAC, we take a proactive approach to ensure overhead allocation stays accurate and aligned with your estimates. Here’s how we do it:
Set Target Budget Percentages:
We start by projecting target budget percentages for each overhead category—things like administrative payroll, office expenses, and equipment maintenance. These percentages act as benchmarks to monitor overhead spending.Monitor Overall Business Budget vs Actuals:
Using those target percentages, we continuously compare budgeted overhead to actual overhead incurred. Staying within these ranges keeps your overhead allocation to jobs consistent with the percentages used in estimating.Factor in Active Jobs:
One of the biggest variables is the number of active jobs during a given period. Allocating overhead among five jobs when only three are active can leave a significant portion of your overhead unaccounted for. We ensure the overhead allocation adjusts dynamically based on how many jobs are actually in progress, so no costs fall through the cracks.
This process gives you accurate, actionable insights and ensures your overhead recovery is aligned with your financial goals.
Conclusion
Overhead Allocation Comparison ensures your jobs fully account for their share of operational expenses. By tracking this metric, you’ll refine your estimating accuracy, manage overhead effectively, and protect your bottom line.
At Catalyst Construction Accounting & Consulting (Catalyst CAC), we specialize in helping residential construction businesses just like yours track and understand key metrics like GPM and more. Whether you need help with construction bookkeeping (data accuracy, essential construction financials), construction controllership (holistic oversight over construction financial processes & strategic financial guidance), or a construction CFO advisor (forward-looking, strategic, big-picture financial guidance), we’ll work with you to eliminate financial chaos and give you the tools to drive profitability and growth.
Let us help you turn your data into dollars. Contact us today to learn how we can become your valued partner in building a stronger, more profitable business.
What’s Next -
In the next episode of the Data to Dollars Series, we’re diving into Job Profitability—the third and final piece of The Trifecta for Financial Project Management. This metric is where it all comes together—showing you whether each project is truly delivering the returns you expect. Stay tuned for actionable insights to ensure your jobs aren’t just breaking even but driving your business toward scalable success!
