Overhead costs are always there, rain or shine. But what exactly falls under this umbrella term?
Overhead costs are business expenses not directly related to producing a product or service. This includes rent, utilities, and insurance.
Here’s a guide to these costs, including overhead cost examples to drive the point home.
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What Is an Overhead Cost?
So what’s the definition of overheads exactly? Also known as indirect costs, overhead costs are expenses that are necessary for a business to operate. They include everything from storage costs to software fees. And they can be recurring or one-time.
Overhead doesn’t include direct costs, which are your production expenses. These include anything you can trace back to producing a specific product or service, like raw materials and manufacturing labor. Direct costs are about the activities that earn you a profit. Overhead costs are more general and apply to the business operation as a whole.
How To Calculate Overhead Costs
You can calculate overhead costs in two ways: per unit produced or per hour worked.
For both options, add up all your indirect expenses over a specific period, such as a month or a year. Then, divide this total by either the number of units produced or hours worked during that period. This gives you the overhead cost per unit or per hour.
Imagine you run a roofing business. It has various overhead costs each month. These include utilities, salaries for administrative staff, and equipment maintenance. The costs amount to $20,000 for the month. In that same month, your staff work 2,000 hours.
You can calculate the overhead cost per hour like this:
Total overhead costs / Number of hours worked = Overhead cost per hour
$20,000 / 2,000 = $10 per hour
So, for each hour you or your employees work, you incur $10 in overhead costs.
What Are the Different Types of Overhead Costs?
Overhead costs belong to three main categories: fixed, variable, and semi-variable. Here’s a breakdown:
Fixed Overhead Costs
These expenses stay constant, even if production or sales volume changes. You have to pay them no matter how much revenue you generate.
Examples of fixed overhead costs include property taxes, insurance premiums, and rent.
Variable Overhead Costs
These expenses grow and shrink as production and sales volume fluctuate. As the business produces more, variable overhead costs increase. When production slows down, these costs decrease with it.
Examples of variable overhead costs include hourly wages, sales commissions, and energy costs to run production lines.
Semi-Variable Overhead Costs
Also known as mixed costs, these expenses are like a hybrid of fixed and variable overhead costs, meaning there’s a constant base cost and a variable cost that changes with production or sales volume.
So, what is an overhead expense with both a fixed and a variable cost? Salaries with commissions on top of base pay are one example. Certain utilities that charge both a fixed fee and variable usage rates are another.
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26 Common Overhead Cost Examples
Many different kinds of expenses fall under overhead costs. Here’s a list of the ones that show up most often:
Rent and Utilities
- Office or factory space rent
- Electricity, water, and gas bills
- Property taxes and insurance
Administrative Costs
- Salaries for management, accounting, and human resources staff
- Office supplies and equipment
- Legal and professional fees like lawyers and consultants
- Software subscriptions and licenses
Insurance
- General liability insurance
- Property insurance
- Workers’ compensation insurance
Employee Benefits
- Health insurance premiums
- Retirement plan contributions
- Paid time off like vacation and sick leave
- Training and development programs
Sales and Marketing
- Advertising and promotional materials
- Trade show and event expenses
- Website hosting and maintenance
- Social media management and content creation
Technology and Communication
- Phone and internet service provider fees
- IT support and maintenance
- Cybersecurity tools and services
- Software and hardware upgrades
Transportation and Logistics
- Vehicle maintenance and repairs
- Fuel costs for company vehicles
- Shipping and handling fees
- Warehouse storage costs
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Top 10 Tips To Reduce Overhead Costs
If you’re worried about spending too much on overhead costs, here are some practical tips for controlling them:
1. Reassess Your Workspace
One way to cut overhead costs is to stop spending so much on your office space. To lower rent costs, shift to remote or hybrid work. You could also move to a shared office to save on rent and utilities. If brick-and-mortar is a must, sublease unused office space to generate extra income.
2. Optimize Your Processes
Review your workflows. Find areas to improve efficiency and reduce waste. Automating repetitive tasks can save time and resources.
3. Shop Around for Deals
Compare prices from different vendors and suppliers to find the most cost-effective options. Don’t be afraid to negotiate better rates or discounts, especially if you’re loyal to one company or make large purchases.
4. Buy in Bulk
Purchasing supplies in larger quantities can help you get volume discounts. Just don’t buy more than you can store or sell.
5. Review Your Software Subscriptions
Take a look at your software. Cancel subscriptions that don’t add enough value. If you like what you use, negotiate better rates. But if not, try Joist’s all-in-one platform to streamline your invoicing, payments, and project management. Keeping everything in one place saves you money.
6. Save Energy
Invest in energy-efficient lighting, appliances, and equipment. It might cost more upfront, but it saves thousands in the long run. You can also encourage employees to adopt energy-saving habits, like turning off lights and equipment when not in use.
7. Go Paperless
To save money on paper, use electronic communication and collaboration tools. Digitizing your records lowers printing and storage costs.
8. Outsource Tasks
Some tasks just don’t need full-time workers. Outsource tasks like bookkeeping, IT support, and marketing to specialized providers. You access expert services and save on the overhead costs of hiring full-time employees.
9. Review Insurance Policies
Shop around for better insurance rates and coverage options. Consider bundling your policies or raising your deductibles to lower your premiums.
10. Create a Cost-Conscious Culture
Your staff are the only people who know the business as well as you. Educate them about the importance of managing overhead costs. Encourage them to share ideas for cost-saving measures, and reward their efforts.
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Make Collecting Payments the Easiest, Most Efficient Part of Your Business
With overhead and service costs, you have enough to worry about. Let Joist handle your payment process.
Joist makes it easy to accept credit card payments from clients. Simply issue an invoice, switch on Payments, and get paid. You cut cash flow delays and spend less time tracking down payments. You can even collect down payments on-site.