Small Tools and Consumables: Expense or Allocate?

The Cost Nobody Budgets and Everybody Pays

Saw blades, drill bits, fasteners, tape, string line, blades, marking paint, the impact driver that disappeared in month three. No single item is worth an accounting decision. Added up across a year, a mid-sized contractor spends somewhere between 1% and 3% of direct labor cost on this.

On $3m of labor that is $30,000 to $90,000, which is real money going somewhere nobody is watching.

Three Ways to Handle It

Expense as incurred, to overhead. Simplest. Buy it, code it to a small tools account, forget it. The cost never touches a job, so every job margin is overstated by whatever share it consumed.

Charge directly to the job. Accurate when someone buys blades for a specific job and codes the receipt. Unworkable in practice for a van stocked with consumables serving four sites in a week.

Allocate through a rate. Pool the cost, recover it through a per-labor-hour charge. More work to set up, and the only approach that survives contact with how crews actually operate.

Setting the Rate

Pull last year's total for small tools and consumables and divide by direct labor hours. If you spent $54,000 across 36,000 hours, that is $1.50 per hour. Every job then picks up $1.50 per direct labor hour as an indirect charge, and the pool is relieved by the same amount.

At year end, compare what you allocated against what you actually spent. Persistent under-recovery means the rate is too low and every job margin on your reports is flattering you.

This sits alongside your other indirect cost allocation — same mechanism, same discipline.

Where the Capitalisation Line Sits

A consumable is used up. A tool has a life. The dividing line is your capitalisation policy, and most contractors set it somewhere between $500 and $2,500 per item.

Below the threshold: expense it to the small tools pool. Above it: capitalise and depreciate, and it becomes part of your equipment costing rather than consumables.

Two things worth getting right. Set the threshold in writing and apply it consistently, because an auditor will ask. And do not split a purchase to stay under it — a $4,000 order of eight $500 tools is a judgement call you should be able to defend.

The Part That Is Not an Accounting Problem

Tool loss is usually the larger number, and no allocation method fixes it. If your small tools cost per labor hour is drifting upward year over year, the rate is telling you something about control rather than prices.

The contractors who get this under control tend to do unglamorous things: a sign-out system for anything above a value threshold, tools tagged by crew, a quarterly count, and a foreman who knows the number is visible. None of that is accounting. But the accounting is what makes it visible.

A Reasonable Default

For most contractors: pool it, allocate on direct labor hours, review the rate annually, capitalise above $1,000, and look at cost per hour as a trend rather than an absolute.

It is a small thing. But it is the difference between a job margin that is roughly right and one that is quietly overstated on every single job you run.