What is overhead cost?

Overhead cost is the additional cost added on top of your employees' cost rates (salaries) whenever they track time. When people track time, both their 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.

Setting up your overhead

If you want to enable overhead on your organization, head to Settings - Addons. Find the Overhead addon and turn it on. Then, head to Settings - Overhead, and you will see this screen:

First, you will need to set up three things at the top of your screen:

Facility cost. Monthly sum of all of your facility costs such as utilities, software licences, office rent and the like. You can enter your facility costs in appropriate sections for easier management:

Amortization period. The period that is taken into consideration when calculating the projection (see above). If set to No averaging, the projection will be identical to the last month. If set to any number of months, the number of months taken into consideration will be the previous month + the number of months in the setting. (i.e. if you set it to 1 month, it will take the current month and 1 past month into the equation).

Calculation date. 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.

The final column, overhead per hour 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.

How overhead is calculated

Overhead is calculated in two different ways: one for elapsed months (under Overhead history), and one for the projection. What you will be seeing at the very top of your screen is your projection. However, let's tackle your historic data first.

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. This data is:

1) Facility costs. A lump sum set up manually for each month.

2) Internal costs. The cost of all hours and expenses tracked against internal projects, plus the cost of paid time off periods.

3) Total hours. This is the sum of time tracked against all budgets (client + internal), plus the time spent on paid time off periods.

4) Client hours. The total amount of time tracked against client budgets.

5) Internal overhead hours. Not used in further calculations.

6) Time off overhead hours. Not used in further calculations.

All of this data is pulled from elsewhere in Productive and displayed here for ease of access.

Initial cost calculations

The next step is to calculate your costs per hour.

7) Facility cost per hour. Calculated as 1) facility costs divided by 3) total hours.

8) Internal cost per hour. Calculated as 2) internal costs divided by 4) client hours.

Facility cost per hour = facility costs / total hours
Internal cost per hour = internal costs / client hours

Once these costs have been calculated, they are further averaged. Based on your averaging period, the facility costs / internal costs are average across the appropriate number of past facility costs / internal costs.

Final overhead calculation

Once we have calculated our facility cost per hour, and our internal cost per hour, the only thing left to do is to add these two together. This will give us our 9) overhead cost per hour.

Overhead cost per hour = facility cost per hour + internal cost per hour

Projection calculation

The projection is current data that is derived from your historic data. It is calculated as an average of the data in your amortization period.

First, we take the last value for the facility cost, with no averaging taking place. Then, we 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.

Notice how the calculation only considers the period set up under Amortization period above (last month + 3 more months).

Once that is done, we calculate the costs (facility cost per hour, internal cost per hour and total overhead per hour) based on this data.

In the above case, our costs are 

Facility cost per hour. 5,500 $ / 67 = 82,09 $

Internal cost per hour. 61,19 $ / 66 = 0,92 $

Overhead per hour. 82,09 $ + 0,92 $ = 83,01 $

FAQ

Why is my overhead so high?

If your overhead is suspiciously high, this is likely because you have very little time tracked, or because you have a disproportionate amount of time tracked against internal projects. Please check your overhead history.

How should I set my amortization period?

There is no one correct answer here. The best guideline is to set the amortization period to coincide with the time that you have decent time tracking in. E.g. if you only started properly tracking time in April, but your March data is not good, set the amortization period to include April as the first month.

What is the best way to set my overhead calculation date?

The calculation date needs accurate data for the previous month(s). As such, it is a good idea to have everyone track their time for the previous month before this calculation is done.

How do I calculate my facility costs?

Lump together all of your software licences, utilities and other predictable and steady expenditures. Add them all together - these are your facility costs.

I tracked time in the past, can I recalculate overhead values?

You sure can. Head to Settings - Overhead, and find this menu icon. Click it, and select Recalculate overhead.

Can I recalculate my projection data?

No, recalculating projection data the same way that you would for your historical data is not possible.

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