Overhead costs are easy to overlook: money goes toward keeping the company running, but these costs do not appear in an individual project's estimate or the customer's receipt. The result can be puzzling: each project seems to have a margin, yet little free cash remains in the account.
This article offers a simple system for bringing overhead into the numbers: identify what it includes, agree on rules within the team, record it consistently, and allocate it across projects.
The focus is project-based businesses such as renovation, construction, finishing, design, and engineering. The same logic applies to other services: overhead is the cost of keeping a company operating between and around projects.
Contents:
What are overhead costs in simple terms?
Overhead costs support the company as a whole and cannot reasonably be assigned to one project or service. They arise even on days when no one is working at a particular site: office costs, management, and software services. Track selling expenses, taxes, and mandatory payments separately according to their purpose.
Direct project costs include workers, materials, delivery, and subcontractors. You can document and link them to a specific site. Overhead covers the infrastructure that lets the company start and manage projects.
Consider a company with two projects. One has a large advance payment; the other has a small one. If you charge office rent to whichever project's money happens to be in the account, that project will appear unprofitable while the other looks exceptionally profitable. Decisions will then depend on a coincidence rather than project economics.
What counts as overhead?
The composition of overhead depends on your business model, but several categories are common:
- Office and management: rent, communications, internet, office equipment, and salaries for administrators, accounting staff, managers, and legal staff.
- Services and software: CRM, telephony, file storage, task trackers, software subscriptions, and accounting tools (the 101 App often falls into this group).
- Sales and marketing: advertising, the website, content production, marketplace commissions, and sales staff pay. These are closer to selling expenses and are best tracked in a separate category.
- Shared business service charges: banking fees and other costs that do not relate directly to one project. Track taxes and contributions separately according to their nature and applicable rules; payment processing fees may relate to a specific sale.
- Development: training, certification, and developing standards and procedures. Moving money into a reserve fund is not an expense in itself.
Some costs sit on the boundary. A tool used at several sites may be treated as overhead, or its rental cost or depreciation may be assigned to projects when you can do so reliably. The key is to agree on a rule and apply it consistently. If the rule keeps changing, the figures lose their meaning.
Why does ignoring overhead create an illusion of profit?
For a management calculation, first subtract a project's direct costs from its revenue to see how much it contributes toward shared costs. Then allocate overhead for the period and account separately for selling expenses and taxes to estimate the final result. If you include allocated overhead in the project's full cost, do not subtract it again. Without overhead, each project may look profitable even while the company as a whole struggles.
This is how hidden costs accumulate: office spending disappears between projects, small payments are spread across cards, subscriptions are forgotten, and logistics is tracked separately. Without management accounting, these amounts are hard to see together.
A quick test: look at the company's recurring monthly payments and ask how many active projects are needed to cover them. If you cannot answer, examine the structure of shared costs and the team's workload.
How should you track overhead costs?
The task is straightforward: collect company costs in one place, assign them to clear categories, and establish who records them and when. Project businesses often separate project costs from company costs. Keep selling expenses separate from overhead as well, so you can see the cost of acquiring sales and the cost of management.
A process that works even for a small team:
- Start with a short list of categories: Office, Administration, Services, Company Transport, and Development. Track selling expenses and taxes separately. Expand the list as the business grows. The article on expense categories in construction and renovation provides a starting point.
- Set a rule for borderline costs such as tools, communications, vehicles, and travel. Make sure the team knows that the same kind of expense always goes into the same category.
- Collect source documents promptly: receipts, invoices, and completion certificates. If documents arrive late, the analysis and decisions will lag too. The same principle applies to direct costs: a document, an expense category, and a project address make them traceable.
- Close the month: total overhead, compare it with the previous month, and note what grew and why. Regular, up-to-date records matter in management accounting.
How do you allocate overhead to projects and calculate full cost?
In management accounting, a service's or project's full cost may include direct costs plus a justified share of overhead. Assess selling expenses and taxes separately. A simple method described in the article on cost is to divide monthly fixed expenses by the actual volume of work completed that month. For renovation work, area (m²) is often a useful basis.
| Allocation basis | When it fits |
|---|---|
| m² of completed work | Renovation, finishing, and similar projects where area reflects the workload well |
| Hours or person-days | Projects of varying complexity where team time matters more than area |
| Revenue | Projects with very different prices but similar sales and management processes |
| Number of projects | A small portfolio of similar jobs when you need a quick estimate |
A practical way to start without a lengthy methodology:
- Add up monthly overhead, such as office, software, and management costs. Track taxes and selling expenses separately.
- Choose a basis you can actually measure each month, such as m², hours, or revenue.
- Calculate an overhead rate, such as overhead per m² or per hour.
- For each project, multiply its allocation basis by the rate. Add that overhead share to direct costs to calculate full cost.
- Compare full cost with current prices and identify projects where the price is close to the cost.
This model is only an approximation, but it shows for the first time what it costs to keep the company running per unit of work. You can refine the basis and rates later and add analysis of planned versus actual results.
Common mistakes and quick checks
The difficulty with overhead is often less about arithmetic than about discipline and consistent rules. Common problems include:
- Mixing categories: company costs are assigned to projects to make the figures look tidy, and project reports become unreliable for decisions.
- Too many categories: 60 expense categories that nobody uses consistently. Eight to twelve categories with shared rules are often more useful than perfect detail on paper.
- Recording costs late: receipts surface a month later, expenses are missed, and management accounting becomes history rather than a tool for current decisions.
- No monthly close: money has been spent, but nobody draws conclusions, so the next month repeats the last.
A quick check: as work volume grows, compare overhead per unit of your chosen basis (1 m² or one hour) over time. An increase may reflect higher shared costs, lower utilization, or a change in the mix of work; check the cause before drawing a conclusion.
How can you simplify tracking in the 101 App?
Spreadsheets can become difficult to manage when there are more than two or three projects. Versions diverge, nobody knows which file is current, and categories become inconsistent. Many teams therefore move to a system that assigns costs to the right category when they are recorded and brings them together for analysis.
In the 101 App, project costs are generally recorded against projects and expense categories, while company costs have a separate accounting area (in PRO+, the Company Fund can support this approach). This helps you view the financial result for individual projects and the business as a whole.
To set up expense categories and stop debating where a payment belongs, see these blog articles: expense categories (in Russian) and allocating expenses by category (in Russian).
Management accounting then adds regular reports, analysis, and control over the cost structure. There is a separate introduction to management accounting (in Russian), and another article about tracking business income and expenses (in Russian).
Ultimately, managing overhead involves three actions: total the costs, classify them consistently, and allocate them to projects using a chosen basis. Once you do that, pricing and team capacity become easier to judge.
