Glossary · Invoicing & Pricing
Overhead and profit
In short
On a mixed contract, overhead and profit are spread across the activity types pro rata by direct costs before the 15% test is run.
In full
On a mixed contract, overhead and profit have to be spread across the different kinds of work before the 15% test is run. How they are spread can change the answer for the entire contract.
Overhead and profit are contract-wide and do not attach to a single activity. ADOR's worksheet directs that the percentage for each activity be determined on its represented value including both overhead and profits, and a comment beneath the chart states that overhead and profit may be applied to each bucket based on their percentage.
ADOR Tax Policy confirmed the method on August 25, 2026: allocate pro rata by direct costs. Convert the total costs associated with each activity type into a percentage, and allocate overhead and profit to each on that basis.
Because the 15% test is all-or-nothing, the allocation method can change the classification of a whole contract.
ADOR Evaluating Mixed Construction Contracts worksheet, section 2; ADOR Tax Policy information letter, 2026-08-25