Idle facilities sit completely unused, while idle capacity is the unused part of a facility that is still partly working. Both carry cost into the indirect pool, and both can raise an overhead rate, but they are not the same thing and should not be treated the same way in a bid.
Key takeaways
- Sort every idle cost line as an idle facility or idle capacity before it reaches the rate.
- Test whether an idle facility was needed when acquired and became idle for a cause nobody could reasonably have foreseen.
- Ask whether idle capacity could be sublet, rented, or sold before it stays in the rate.
- Settle one shift basis for each facility and use it from bid to bid.
- Show idle costs as a separate line instead of blending them into the active rate.
Overhead rates look simple in a spreadsheet. You add up the indirect costs, divide by a base, and apply the resulting percentage to every bid. The trouble starts when the pool holds costs for space and equipment that is not doing work this year. Those costs are real, but they do not all belong in the same place, and lumping them together can move a bid price more than anyone intended.
Input prices make the problem sharper. Contractormag reported that "On October 15 the Bureau of Labor Statistics released its latest Producer Price Index data." The same coverage put the key figure this way: "The October 15 BLS report shows a 1.3% monthly rise in the Producer Price Index, the largest since March 2022, with significant increases in construction input and energy prices." ( Contractormag) When input prices rise, idle space costs more to carry, and a rate built on older numbers understates what a bid needs.
Getting the split wrong cuts in two directions. If you load a closed plant into the bid rate, you may price yourself out of work that a competitor with a leaner pool can win. If you leave out idle costs that are real and allowable, you absorb them from margin on every job, and the shortfall shows up at year end rather than in the bid. Either way, the fix starts with knowing which kind of idle cost you are looking at.
This guide walks through the steps in the order most estimators would take them. The reference point is the federal cost principle on idle facilities and idle capacity, FAR 31.205-17, which sets out when these costs are allowable on government cost work. Its definitions still give you a clean way to split the pool, and its tests make useful questions for your own records.
Step 1: Pull every idle-prone asset into one list
Start with the accounts, not the rate. List every building, yard, shop, production line, and piece of equipment that carries cost and is not fully used. For each one, note the cost sitting in the indirect pool, the period it covers, what it was bought or leased for, and what it does now. Add the date it stopped being fully used, if you know it.
Build this list from the account detail rather than from memory. Once the rate is built, the list is hard to tie back to the accounts, and a mismatch is easy to miss. A short list that ties to account numbers is worth more than a long one that only looks complete. For related input checks, see Construction estimate audit: 5 inputs before a bid.
Include leased space as well as owned. Idle leased space is still a cost in the pool, and it often has the clearest paper trail, because the lease shows the terms, the end date, and any early-exit language. Leased or rented equipment belongs on the list for the same reason.
Step 2: Sort each item as an idle facility or idle capacity
The federal text gives two definitions that work as sorting tests. The FAR text reads: "Idle facilities means completely unused facilities that are excess to the contractor’s current needs." Idle capacity is different: "Idle capacity means the unused capacity of partially used facilities."
Apply the test to each line from step 1 and ask whether any part of the facility is working. If none of it is, the item is an idle facility. If some of it works and the rest sits empty, the item is idle capacity. A warehouse with one bay in use and two bays empty is idle capacity. A closed plant with the lights off is an idle facility.
Some items fall between the two. A building where one crew uses a single room is partly used, so it belongs in idle capacity, but the empty share should be measured, not guessed. Walk the space, count the bays or machine hours, and keep the method alongside the figure. That method is what makes the split defensible later. If you cannot measure it, label the figure as an estimate.
Be careful with seasonal facilities. A plant that runs hard for part of the year and sits quiet for the rest is not unused in the calendar sense, but the quiet months still carry cost. Decide how those periods will be treated, and apply that treatment to every seasonal item. Mixing treatments within one year is one of the fastest ways to make a rate impossible to reconcile.
Step 3: Test whether the idle facility was needed when acquired
An idle facility is not automatically a cost you can carry in the rate. The federal text ties allowability to why the facility became idle. One condition is that the facility was necessary when acquired and is now idle for a reason the decision-maker could not reasonably have predicted. The text reads: "Were necessary when acquired and are now idle because of changes in requirements, production economies, reorganization, termination, or other causes which could not have been reasonably foreseen."
For each idle facility, answer three questions. Was the space needed when you acquired it? What changed to make it idle? Could that change have been seen coming when you decided to buy or lease? The causes the text names are changes in requirements, production economies, reorganization, and termination. If your idle building came from a contract that ended early, that points to termination. If it came from an expansion that never happened, the answer is less clear, and you should say so.
Do not rely on memory for these answers. Pull the board minutes, the lease, the capital request, or the approval email. If that paper is missing, treat the gap as a finding in its own right. A missing document does not settle the question, but it weakens the split, and the bid file needs a plain explanation before anyone relies on it.
Foreseeability is the hard part. A closure that followed a clear, dated event is easier to defend than a building that sat empty after a plan that was optimistic from the start. Lay out the timeline, including the points where the plan still looked sound, so a reviewer can judge the reasoning rather than only your conclusion.
If the answer to the foreseeability question is unclear, do not settle it inside the rate. Flag the item, state the open question in one sentence, and ask the person who made the original decision to confirm the reasoning in writing. An open question stated plainly holds up in review better than a settled-looking line that rests on an assumption nobody wrote down.
Step 4: Ask whether idle capacity could be sublet, rented, or sold
Idle capacity has a second test, and it is about options. The federal text allows these costs only when the capacity was necessary or originally reasonable, and when subletting, renting, or sale cannot reduce or eliminate them. The text reads: "Such costs are allowable provided the capacity is necessary or was originally reasonable and is not subject to reduction or elimination by subletting, renting, or sale, in accordance with sound business, economics, or security practices."
Work through the three options for each idle capacity line. Each option raises a different question, and the evidence that settles it is different too.
If any option is open for a line, that cost can be reduced. The honest place for it is a separate line with a note explaining why it stays in the pool, not buried in the general rate.
The test is about what sound business practice would do, not what is easy for you. A building you could sublet only after two years of marketing is in a different position from one a broker could lease this quarter. Keep a short log of what you actually tried, who you spoke to, and what the market looked like at the time. That log does more for a rate review than a general statement that the space was hard to rent.
Security and operating constraints can also limit options. A constraint counts only if it can be shown, and an undocumented one will be read as an option you never explored.
Step 5: Choose the shift basis before you measure usage
Idle capacity is measured against something. The most common measure is hours of use compared with hours available. The FAR text recognizes that the choice of available hours matters: "A multiple-shift basis may be used in the calculation instead of a one-shift basis if it can be shown that this amount of usage could normally be expected for the type of facility involved."
A one-shift basis counts only the hours in a single shift. A multiple-shift basis counts more hours and can change the idle share a lot. The text allows the multiple-shift basis only when you can show that this level of usage could normally be expected for that type of facility. Showing it means pointing to how similar facilities in your operation or industry have run. It does not mean picking whichever shift count gives the answer you want.
Settle the basis once for each facility and use it from one bid to the next. Changing the basis between bids to move the number is the fastest way to lose a reviewer's trust. If the facility's normal pattern changes, change the basis, but date the change and give the reason, so it stays visible rather than hidden in a new spreadsheet.
The basis is a question about the facility, not the job. A single job may run one shift in a plant that normally runs two, and that should not change how the plant's idle cost is classified for that job. Decide the basis at the facility level, then apply it to every bid that draws on the facility.
Mismatched bases produce misleading percentages. The numerator and the denominator have to describe the same thing, or the percentage means nothing.
Step 6: Keep the active pool and the idle pool apart in the rate
Once each item has a classification, build the rate from the costs that support active work and show the idle costs as their own line. This keeps the bid readable. An owner can see how much of the price covers space that is not producing, and can ask whether that makes sense for this job. A blended number makes that question hard to ask.
Lead with the active pool and show the idle line second. The discussion then starts with the work being bid. The idle line becomes a separate item the owner can accept, question, or ask you to reduce, rather than a hidden part of a number already on the table.
Separation also protects you when the work changes. If an idle bay is rented next quarter, you remove one line instead of rebuilding a blended rate from scratch. If a facility is sold, its line goes with it. A blended number hides both events, and the first time someone notices, the rate will look padded.
Markup is a separate question, and the two often get confused. Freshbooks makes the point with a simple case: "A clothing store might add a 50% markup to the cost of a t-shirt." Its definition of gross profit markup also starts from cost: "Gross profit markup is calculated by subtracting the cost of goods sold from revenue, then dividing by the cost of goods sold, and multiplying by 100." Put simply, cost is the base. An idle dollar that lands in the cost of work gets multiplied into the price along with everything else, so it is never free just because it looks like a small line.
Be careful with the base. The idle line should be applied to the same base as the rest of the overhead you allocate, so the percentages add up to the total pool. If the base changes between lines, the bid will not reconcile to the accounts, and the gap will surface after the job closes.
Finally, add the active pool and the idle lines back together and compare the sum with the account totals for the period. A small unexplained difference is usually a misclassified account, and it is far easier to fix now than during a review.
Step 7: Write the split into the bid file
Finish by writing the split into the file the bid is built from. Its job is to answer a question months from now. Keep the sources themselves, not only your summary of them, because the summary will not answer the question, but the lease or the minutes will. For each idle item, the file should show the fields below.
The steps here describe how to think about the split. They do not replace your contract terms, your accountant's advice, or the rules for the specific job. Where a contract sets its own treatment of idle costs, that treatment governs. Where your accounting system already has a convention, follow it and note any difference from this approach.
Illustrative example: splitting one warehouse
Suppose a warehouse has 4 bays and 2 of them sit empty while the other 2 are in use. Because part of the building still works, step 2 classifies this as idle capacity, not an idle facility. Counting bays gives 50% idle, so half the space cost goes on a separate idle line and the other half stays in the active pool. This is an illustration only. Your own bay counts and cost figures will differ.
Your next step today
Today, pull the account detail for the one indirect cost line you suspect is idle and find its lease, minutes, or approval record. Run it through steps 2 and 3, and write the result in your bid file. For related inputs, see Job cost breakdown: 3 parts to check before you bid.
Frequently asked questions
Should idle costs go into the main overhead rate?
No. Each idle cost needs to pass the tests in steps 3 and 4 before it is carried, and it should appear on its own line.
Can the shift basis change the idle share?
Yes. A multiple-shift basis can change the idle share a lot, so settle one basis for each facility and use it from bid to bid.
What if an idle building is sublet later?
Remove its line from the rate once the space is rented, because a separate line makes that change simple to make.