Project Overhead refers to the costs of a project that a company incurs indirectly – also called indirect costs. These expenses cannot be directly attributed to one project, but instead are costs related to running the company and therefore apply to all projects the company completes.
Project Overhead is applicable mostly to project business, or project-based companies. If your company delivers projects as its business (e.g. architecture, construction, engineering, ETO manufacturing, professional services), then Project Overhead is a useful concept and metric you should be tracking.
Project Costing Related Problems You May Be Facing
There are many common project cost management problems beyond project overhead that project-based companies experience. Are any of these familiar to you?
Spreadsheets are at the core of your cost management processes.
To eliminate spreadsheets, gain real-time insight into your business, and achieve full financial control of your projects, you need an integrated project business system.
Your project estimates are not accurate, consistent, or timely.
You need a systemized way to produce project proposals that reflect how the project will actually go.
You don’t really know if a project is profitable and on budget until it finishes.
You need an automated way to do estimate-at-completion (EAC), so you consistently reevaluate your projects as they progress.
You have no way to track costs accurately as the project progresses.
You need a single system that integrates the operations and financials, so they work together seamlessly. As tasks are completed, costs are reported instantly.
Earned value analysis is just too difficult to do consistently.
You should be able to calculate earned value automatically and in real-time.
You don’t know when or how a project’s margin slips.
You need an automated way to monitor every aspect of every project and alert you to any deviations as they happen in real-time.
Project Overhead Examples
Project Overhead costs may include expenses such as office space, utilities, director and executive level employees, benefits, insurance, taxes, etc. These costs are generally treated as fixed costs and apply universally to all projects across the company.
Contrastingly, expenses directly allocated to a project include items such as material for the project, resources and labor, and equipment rental. These expenses may be billed directly to the client on a particular project and they are included in the project profit and loss statement as costs of goods/services sold.
Learn more about tracking project costs in real-time. Download the Project Business Automation Blueprint. It is the definitive guide to creating a comprehensive business system for your Project Business that ties together your project operations and financials seamlessly.
Accounting for Project Overhead
Project Overhead costs are generally included in your financial statements as selling and administrative expenses. However, there are ways to calculate overhead for project business management purposes.
For practical analysis of your project overhead costs, you may want to analyze overhead as a percentage of project sales. To calculate the overhead rate, divide the total overhead costs of the business in a month by your project monthly sales/revenue. Multiply this number by 100 to get your overhead rate.
For example, say your business had $50,000 in overhead costs in a month and $1,000,000 in sales.
Overhead Rate = Overhead Costs / Sales
The overhead rate is $50,000 / $1,000,000 = .05 or 5%
This means that the business spends five cents on overhead for every dollar that it makes. This number also gives you a full picture of your project expenses and the margins you need to target in your projects to be successful as a business.
Also, this metric is useful to track to measure performance over time and to see if your fixed cost can stay the same while your revenue grows, showing that you can increase profit by scaling and taking on more projects.
Learn more about a complete system to track and manage your project financials.