Define the Allocation by WBS Codes

Defining the allocation by WBS codes is a two-step process. First, you must allocate the value of the financial item by WBS code. For example, if allocating by bid items, you must decide how much of the value should be allocated to the first bid item, then how much to the second bid item, and so forth. These allocations are made in dollar amounts or percentages of the total value.

The second step is spreading that allocated cost to each WBS code and to the actual cost items that are assigned to that code. The spread can be pro-rated based on cost or spread equally.

Note: For example, you have a financial item to calculate overhead and want to allocate it by bid item, which is a WBS code. There are five bid items, numbered 001 through 005. The amount of overhead is $10,000. First, you have to decide how much of the $10,000 should go to each bid item. For pricing reasons, you select 30% (or $3,000) to bid item 001, 40% (or $4,000) to bid item 002, and 10% (or $1,000) each to bid items 003, 004, and 005. Your allocation is as follows:

Bid Item

%Allocated

$Allocated

001

30

3,000

002

40

4,000

003

10

1,000

004

10

1,000

005

10

1,000

The percentages are saved; therefore, if overhead recalculates to $12,000 at some later time due to changes made to the change order, the $Allocated will be adjusted accordingly to maintain the same percentage allocations.

Once the allocation is defined by WBS code (bid item), you then define how to spread the costs to the cost items assigned to each bid item. In the above example, if there are 15 cost items assigned to bid item 001, the $3,000 will then be spread either equally ($3,000/15) to each cost item, or pro-rated based on cost. In this manner, all the overhead is distributed to individual cost items and becomes part of their adjusted cost.

If the financial cost item in the change order is marked Deduct, the allocations are deducted from the extended cost of the cost items. However, financial cost items are typically added to the change order.