There's More Than One Kind of Overhead

Many contractors have learned that it’s important to separate overhead costs (expenses) from those associated with production (Cost of Goods Sold, or “COGS”). Some of the production costs are pretty obvious. If you go to your lumberyard and buy framing lumber for the Jones job, for example, it’s a no-brainer to assign that cost to a COGS account. And some overhead costs are pretty obvious—office rent, utilities, office supplies, and the like (see Overhead Cost?, top left).

What about the costs that are associated with producing jobs, but are not necessarily associated with a specific job—costs such as small tools that will be used on multiple jobs, gas for the trucks, and communication plans for phones and tablets that are used on the jobsite? These are less straightforward to classify, but anything that is...