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Increased Company Overhead Costs and Its Reasons

 

Many of American economies are still facing the effects of recession even after five years of the global financial crisis. The American companies are re- examining their cost structures so that sustainable cost reduction can be achieved by reducing their overhead costs or sales, general, and administrative (SG&A).


Company overhead cost plays a significant role in shaping the estimation for any project. A company can face increased company overhead costs due to various reasons. Some of the major factors that lead to increased company overhead costs are as follows:


  • Recession due to lack of new projects

  • Cost inflation

  • Delayed payments

  • Government regulation

  • Increased marketing cost

  • Client related reasons

  • Company's growth

  • Internal flaws

There are various factors that affect the amount of company overhead cost allocated to a particular project. Some of the major factors are given below:

  • Type of contract

  • Project complexity, location & size

  • Need for work

  • Payment schedule

  • Financial flexibility of the contractor

  • Strictness in clientís supervision

  • Percentage of Subcontracted work

  • Number of competitors

It is very important to manage overhead costs with a practical approach. Though the size and composition of overhead costs vary largely by sector, yet, any company, irrespective of sector, that optimizes its overhead-cost-to-sales ratio by one percentage point can increase its earnings by the same amount. Any company that has an above-average overhead ratio for its sector, that reduces the ratio to near the midrange point for that sector, can increase its earnings by 2 to 12% depending on the industry sector. The base used to allocate company overhead costs and its frequency and percentages are as follows:

  • Project duration

  • Number of projects

  • Project bid value

  • Labor, material & equipment cost

  • Direct cost including project

  • Fixed amount added

  • Not including Company Overhead

Increased Company Overhead Costs and Its Reasons

 

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