Overhead Allocation in Construction: How GCC Contractors Know Which Projects Are Actually Profitable

Which of Your Projects Is Actually Making Money?

Most GCC contractors running ten simultaneous projects can tell you the revenue on each one. Ask which is actually making money after overheads, and the room goes quiet.

The cost report shows margin — but that margin ignores SAR 3-5M in overhead that has been averaged across the portfolio and assigned to projects that did not generate it. A profitable-looking project P&L can collapse into a surprise at final account, not because site costs ran over, but because the overhead it was absorbing was never really its own.

That is the overhead allocation problem. And it is one of the most common reasons GCC contractors misjudge which work is worth bidding and which clients they can afford to take.

Three Layers of Construction Cost

Getting allocation right starts with understanding what overhead actually is. Construction costs fall into three distinct layers.

Direct Project Costs

Labour, materials, subcontracts, and equipment hired specifically for the job. These are visible, traceable, and assigned to WBS cost codes at the point of commitment. No allocation required.

Site Overheads

Project managers, site engineers, QS staff, quality inspectors, site offices, utilities, temporary facilities. Technically direct costs — they exist because of a specific project — but often lumped into a separate overhead category and allocated later, if at all.

Corporate G&A

Head office rent, senior leadership salaries, finance function, HR, IT, legal, marketing. These do not belong to any single project but must be recovered across the whole portfolio for the business to be profitable.

The allocation problem starts when a contractor takes all corporate overhead, divides it by total revenue, and spreads it proportionally. Simple. Fast. Wrong.

Why Equal Allocation Produces the Wrong Answers

A SAR 30M villa compound project might sit under the personal attention of a senior director for eighteen months, absorbing finance time, legal time, HR support, and executive bandwidth far out of proportion to its size. Meanwhile, a SAR 200M infrastructure contract is essentially self-administering — its own PM, QS, finance controller, and document team, largely funded by the contract preliminaries.

Apply a blanket 8% G&A rate to both and you show the villa generating 6% net margin and the infrastructure project generating 9%. Reality is probably the reverse.

The projects you think are profitable may be cross-subsidising the ones that are draining the business. You will not know until you allocate more precisely.

Shared Service Overheads: Allocation by Driver

Between direct costs and corporate G&A sits a third category: shared operational services. The procurement department serves five active projects. The plant yard and maintenance workshop supports all sites. The document control team manages the full portfolio. These cannot be attributed directly but are not truly corporate either.

Rational allocation uses a cost driver — a measurable activity that reflects actual consumption:

• Procurement function: allocate by number of POs raised per project, or by total procurement spend
• Plant yard and workshop: allocate by equipment utilisation hours per project
• Document control: allocate by document volume or number of active submittals
• Finance team: allocate by number of transactions or invoice count per project

For a SAR 1.5B portfolio, misallocating shared services by even 15% misassigns SAR 15-20M across the project P&L — more than enough to mask a loss-making contract.

Corporate G&A: Three Defensible Allocation Bases

For head office overhead, three methods are in common use in GCC construction:

By Revenue

Simple and auditable. If Project A is 20% of total revenue, it carries 20% of corporate G&A. The weakness: it rewards complex, high-touch projects and penalises efficient large ones.

By Direct Labour Hours

Better for labour-intensive portfolios — civil earthworks, MEP, fit-out. Tends to underweight turnkey or design-and-build projects where contractor-supplied labour is a small fraction of total cost.

By a Composite Score

Revenue multiplied by a complexity factor. The factor reflects number of active subcontracts, contract type (lump sum vs remeasurement vs cost-plus), and client risk profile. A SAR 50M NEOM design-and-build scores higher than a SAR 80M straightforward remeasurement contract. More defensible but requires a defined, documented scoring matrix.

For GCC contractors running a mixed portfolio of FIDIC lump sum, remeasurement, and design-and-build, the composite approach usually produces the most accurate project-level P&Ls — and the most auditable ones for open-book clients.

The Monthly Overhead Allocation Journal

Policy statements do not allocate overhead. Journal entries do. A structured monthly workflow makes the difference:

By week three of each month: pull approved timesheets from all site and shared-service staff, extract hours by project WBS. Pull equipment utilisation records split by project. Pull PO counts and spend from the procurement module. Calculate each project's share of each shared service pool using the pre-defined driver.

At month-end close: post overhead allocation journals to the job cost ledger — one entry per project per overhead pool. Apply the corporate G&A rate to each project's revenue base. The total overhead allocated across all active projects must equal total overhead incurred. If your shared services cost SAR 6M for the month, SAR 6M gets allocated. No variance sitting in a suspense account.

Projects running above their budget overhead rate trigger a review. It is usually a sign the project is consuming more shared service time than planned — a leading indicator of commercial difficulty worth catching early.

What GCC Contractors Discover When They Get This Right

When structured overhead allocation is implemented for the first time, three patterns consistently emerge across GCC portfolios.

Small, complex projects are less profitable than they appear. A SAR 25M villa compound with seven subcontracts, a hands-on client, and weekly variation disputes was absorbing four times its revenue share of procurement and legal overhead. Net margin fell from an apparent 12% to an actual 7.5% once properly allocated.

Efficient large projects subsidise inefficient small ones. A SAR 300M programme contract with its own embedded PMO, near-zero head office interaction, and a fixed G&A recovery in the contract was carrying more overhead than it actually generated. The company was unknowingly penalising its best-run project.

G&A cost recovery varies by contract type. On cost-plus open-book contracts common in Vision 2030 megaprojects, overhead is explicitly reimbursed as a negotiated markup — typically 8-15% of direct cost. On lump-sum contracts, it must be priced into the bid. Running both types in one portfolio without tracking recovery rates separately means you do not know whether your corporate overhead is funded or not.

Overhead Allocation and Open-Book Contracts

Saudi Aramco, NEOM, and ROSHN are increasingly running open-book contracts where the client reviews the full cost breakdown, including the G&A markup applied. Having an inaccurate or indefensible allocation methodology is not just an internal problem — it becomes a commercial negotiation weakness.

Contractors with documented, auditable allocation policies can defend their markup rates from evidence. Those without them negotiate from a position of uncertainty, often conceding margin they were entitled to recover.

For Vision 2030 contractors bidding on repeat work with the same clients, allocation methodology is increasingly a procurement consideration alongside HSE performance and IKTVA compliance.

Five Practical Starting Steps

You do not need to rebuild your accounting system. You need to change what information flows into it.

1. Categorise every overhead GL account — project-specific, shared service, or corporate G&A. One workshop, documented decision. This is the foundation before any allocation can be meaningful.
2. Add WBS codes to timesheets for shared-service and site staff — procurement officers, site engineers, document controllers, finance staff. Week one of implementation. No new software required.
3. Define one allocation driver per shared service pool — procurement uses PO count, workshop uses utilisation hours, finance uses transaction count. Write it down and do not change it mid-year.
4. Set a corporate G&A rate from last year actuals — total G&A cost divided by total revenue. That is your starting rate. Review it quarterly and adjust for significant portfolio changes.
5. Run one month in parallel with your existing method — before cutting over, run both methods for one close cycle. The gap reveals which projects have been cross-subsidised and by how much.

The Real Question Is Not How Much Overhead You Have

Construction companies do not fail because their projects lose money. They fail because they do not know which projects are losing money until it is too late to act.

Structured overhead allocation is how you build project P&Ls your commercial director can actually use — not just cost reports, but a clear view of which work earns its keep and which is quietly subsidised by the rest of the portfolio.

For GCC contractors scaling toward SAR 1B+ portfolios, this is not a finance nicety. It is the difference between growing the right business and growing the wrong one faster.