Project overhead costs, including wages, rent, and materials, are tied to specific aspects of a project’s contract. Project managers aim to tie each expense to a specific deliverable, but some expenses may span multiple deliverables, resulting in project overhead costs. It’s important to distinguish project overhead costs from business-wide general and administrative overhead costs.
The different types of project overhead costs fall into many of the same categories as recurrent project expenses. They can be fixed or variable, operating or capital, and can include things like wages for workers, rent, materials and equipment, and any other type of expense that is typical of project management. What makes these expenses fall into this category is how they are applied to specific aspects of the underlying contract.
Projects are managed as separate business units with their own budgets, assigned staff, and assigned resources. To determine the profitability of a project, project managers are tasked with identifying the expenses that are specifically incurred to complete the project. These expenses are tied to a project’s deliverables, which refers to the specific list of tasks to be completed in order for the project to be completed and the contract fulfilled.
In an ideal world, each expense generated by a project would be tied to a specific deliverable. However, reality often gets in the way, and certain project expenses tend to span different deliverables or apply to all at once without the ability to allocate the lion’s share of spending to one deliverable over the others. These types of overhead expenses are known as project overhead costs.
Any type of project expense can end up in this category, including salaries for general project managers, for example. These managers spend time organizing the project as a whole, and it may be impossible to allocate time between the various deliverables. Another common type of cost is general administration, which may include staff hired to do project accounting, office supplies, general secretarial help, or the cost of running a main project office. Overhead costs can include a wide range of recurring expenses, such as a storage facility used by the entire project or travel expenses for project managers to attend meetings.
It is important to distinguish between project overhead and business-wide general and administrative overhead. Overall project costs, in general, are project specific. The business has its own overhead that it allocates to customers and projects as a percentage of overhead costs. Although some costs are considered overhead for the project, they are therefore still direct costs of the project. A project contract would be assigned an additional percentage of indirect costs that come from managing the entire business.
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