What is Overhead Cost?
Overhead cost is the additional cost added on top of your employees' cost rates (salaries) whenever they track time on internal and client budgets.
When people track time, their hourly cost rate and the overhead amount (per hour) will be deducted from the billable rate. This further increases the accuracy of your profitability reports to account for the facility and internal costs of your organization.
Adding overhead cost is available on the Ultimate subscription plan.
Client and Internal Budgets
Once the overhead cost per hour is calculated, this small portion of costs is added to the person's cost when they track time in Productive. However, there are differences in how these costs are added depending on whether the time is tracked on client or
internal budgets.
Internal Budgets
When people track time on internal budgets, the Facility cost per hour is added to their cost. For example, if someone's salary is 100 euros per hour and they track one hour on an internal budget, their cost per hour will be 109.43 euros, as it includes the Facility cost per hour.
Client Budgets
When people track time on client budgets, the Overhead cost per hour is added to their cost. For example, if someone's salary is 100 euros per hour and they track one hour on a client budget, their cost per hour will be 139.50 euros, as it includes the Overhead cost per hour.
Enabling Overheads
If you want to enable overhead on your organization, head to Settings > Overhead cost.
It is recommended not to turn on the Overhead feature until you have at least two to three months' worth of data in Productive. Especially important in this regard is consistent time tracking.
After accessing the Overhead cost, turn on overhead using the toggle in the very top right. Then, you will need to set up the following: Facility cost, Averaging period, and the Calculation date.
Setting up Your Overheads
Facility cost
Clicking on the Monthly cost field allows you to add all of your facility costs such as utilities, software licences, office rent and the like.
Tip: organize your facility costs in different cost groups and items for easier management.
Averaging period
Select the period that you want to take into consideration when calculating the overhead cost projection.
For example: if you set it to 5 months, it will take 5 past months into the equation.
Note: As of January 29, 2024, the averaging period can no longer be set to "No averaging".
Calculation date
Select the date when the overhead cost is calculated. On this day, the current projection is finalized and it moves into the overhead history. Additionally, the new projection is calculated.
Ideally, you want all time entries for the previous month to be logged before the calculation. So, set a date by which you expect your team members to have tracked all of their time for the previous month.
Current overhead per hour
The Current overhead per hour amount is the calculated additional cost added to each hour tracked by a person that overhead is applied to. This amount is derived from calculations as outlined below.
Calculating Overhead Cost
Overhead is calculated in two different ways: one for elapsed months (visible under Overhead history), and one for the Projection for the current month.
Overhead history
Overhead is calculated based on the data that you enter into Productive elsewhere.
Specifically, in your time tracking, your expense tracking, and time-off bookings.
Clicking on any past month in the Overhead history will display a breakdown of the costs on the right in a popup window.
From there, you can review the elements contributing to your overhead costs and make adjustments by adding or removing items to customize your calculations as needed.
We'll break down each toggle section below.
Facility cost
A lump sum is set up manually for each month. This covers all monthly costs associated with the organization's day-to-day operations, like office space, utility bills, and equipment added as items in the Facility costs.
Internal cost (the sum of):
Time cost: Cost of hours tracked on internal projects.
Expense cost: Cost of expenses tracked on internal projects.
Time off cost: Cost of paid time off bookings from all people.
Overtime cost: The cost of overtime hours (note: reduces overhead, meaning it reduces the Internal cost group total).
Undertime cost: Refers to the cost associated with undertime hours. These hours represent the difference between the capacity and the actual time spent on tasks or activities logged in the system.
How Does Overtime Reduce Overheads in Productive?
In Productive, overtime is calculated to manage additional costs incurred when employees exceed their regular working hours. Here’s a detailed explanation:
If you have a person on a fixed salary who works 160 hours per month and has a salary of 1600 euros, each hour costs 10 euros (1600 euros / 160 hours).
If that person tracks 200 hours, they have 40 hours of overtime. This overtime results in an additional cost of 400 euros (40 hours x 10 euros/hour).
In Productive, this extra cost is accounted for in the Overtime cost section to ensure accurate financial reporting and budget management. The 400 euros will be expressed as a negative amount (-400 euros) in the Overtime cost section to offset the increased expense and maintain accurate overhead calculations.
Hours calculations
Total hours
This is the sum of time tracked against all budgets (client + internal), plus the time spent on paid time off periods.Capacity
Expected number of worked hours. Only people with fixed cost rate types are taken into account here. Fixed cost rates include all cost rates except for the hourly cost rates (weekly, bi-weekly, monthly, annual).
Client hours
The total amount of time tracked against client budgets. Only people with overhead turned on are taken into account here.
Internal hours (Internal overhead hours)
Total hours tracked on internal projects. Only people with overhead turned on are taken into account here.Time off hours (Time off overhead hours)
Total hours tracked on time off. Only people with overhead turned on are taken into account here.
Tip: Toggle any of the above-mentioned costs on or off to include or exclude them from the overhead cost calculation.
Initial Cost Calculations
Once you have adjusted individual cost groups and decided which ones you want to include in the calculation, the next step is to review your overhead costs per hour.
You can access this information by either clicking on the month you are working on or navigating to the Facility and Internal cost per hour columns in the Overhead history.
Facility cost per hour
Calculated as facility costs divided by total hours.
Internal cost per hour
Calculated as internal costs divided by client hours.
Final Overhead Calculation
Once we have calculated our facility cost per hour and our internal cost per hour, the final step is to add these two values together. This sum will give us our overhead cost per hour.
The Projection for the Current Month
Projection calculations take averaging into account. The calculation does not consider whether certain overhead components were on or off in the past months. Instead, it calculates the average as if all components had been turned on.
For more context: the last value for the facility cost is taken into account, with no averaging taking place. Then, Productive will average the following:
1) internal costs,
2) total hours worked,
3) the number of client hours worked,
4) the number of internal overhead hours, and
5) the number of time off overhead hours.
Note that the calculation only considers the period set up under the Averaging period set above. Once that is done, the costs (facility cost per hour, internal cost per hour and total overhead per hour) are calculated based on this data.
However, if needed, you can manually adjust the averaging period and recalculate the data.
