How should calculations of project and company overhead be based?

Calculating project and company overhead based on historical data is a highly effective approach as it draws from actual past performance and experiences of the business. Historical data provides a factual basis for understanding how much overhead costs the company has incurred in similar projects or timeframes in the past. This data reflects real expenses, allowing for more accurate budgeting and forecasting for future projects. By using historical data, contractors can establish more reliable estimates for overhead, avoiding guesswork and leading to better financial management.

Relying on experience, while valuable, can be subjective and may not reflect the most accurate cost structure. An average percentage of gross profit is a simplified method that might not take into account the unique overhead needs of each project or fluctuating economic conditions. Recommendations from a CPA can provide useful insights but may not fully align with the day-to-day variances encountered in contractor operations. Therefore, historical data stands out as the most dependable source for overhead calculations, ensuring that budgeting aligns closely with actual business practices.