Overhead costs are a frequently discussed, yet difficult-to-define concept in business management, as the definition can vary depending on the context. Traditionally, overhead refers to expenses that cannot be directly linked to the production of a specific product or service, but are still necessary for running the business. This typically includes administrative costs, salaries for support functions, office rent, and other fixed expenses.
In my own practice, I use the term “overhead” in a broader sense than what is typically found in textbooks. For example, if a company reduces its workforce from 20 employees to 15 and experiences lower productivity as a result, I view that as an overhead cost. Even though it is not overhead in the traditional accounting sense, the cut represents an indirect cost that affects efficiency and productivity.
In more formal settings, this might instead be referred to as a consequence of downsizing. The finance department may use terms such as “efficiency costs” or “restructuring costs” to describe the financial impact. But in order to create a more holistic understanding of what is required to operate a business effectively, I find it useful to group everything under the term “overhead.” This provides a clearer overview, which is important when making quick and informed decisions.
The Bigger Picture
By including all indirect costs under the umbrella of overhead, it becomes easier to gain a complete overview of what is required in a project or task. This simplification makes the analysis more manageable and contributes to better decisions that ensure efficiency and long-term success.
Too often, I see businesses getting stuck separating “efficiency costs,” “restructuring costs,” and “support costs,” as if giving a cost a specific label somehow makes it easier to manage. But what happens if you forget one of the categories? You risk not only losing the overview, but also overlooking what is hidden inside it.
Dividing costs into rigid categories is, in many ways, thinking inside the box. It creates an illusion of control, while in reality it can cause important costs to slip through the cracks. Viewing overhead as a collective term, on the other hand, is thinking outside the box. The focus shifts from what the costs are called to how they actually affect the bigger picture.
This broader perspective on overhead costs is not only a method for including all relevant expenses, but also a way of understanding the real consequences of strategic decisions.
I take a similar approach when using rules of thumb like 70/30 to estimate time or costs, even though 60/40 or 80/20 might be more accurate in some cases. The point is not to hit the exact decimal, but to have a simple and practical way of assessing all indirect factors. By making it possible to collect and evaluate indirect costs in this way, leaders can ensure they have a complete picture of how resources are being used and how different costs affect overall efficiency and profitability.
The same principle applies to IT investments, where Total Cost of Ownership (TCO) demonstrates how hidden costs can often be much greater than the visible price.
Traveling? Don’t Forget the Overhead
When planning a trip, it is common to focus on the most obvious expenses such as plane or bus tickets. But to get a more realistic understanding of the total cost, it is important to also include “overhead” — additional expenses that may arise along the way, such as transportation to and from the airport, meals during waiting times, and other unexpected costs.
For example, when driving from Oslo to Tromsø, you may initially focus mainly on fuel costs. But once you also include vehicle wear and tear, toll roads, meals, possible overnight stays, and parking along the way, the total cost can become significantly higher than expected.
This illustrates how important it is to include overhead when planning a trip in order to get a more accurate cost estimate. In some cases, choosing what initially appears to be the more expensive option can actually save money by reducing the many small expenses that would otherwise add up. By considering all factors, you can make better decisions that save both time and money.
Overhead Time for Tradespeople
An installer, carpenter, electrician, or other tradesperson needs specific tools to perform the job efficiently. When the assignment begins, all tools and equipment must be unpacked and prepared. Once the work is completed, the workspace must be cleaned up and everything packed away again. In addition to this, there are conversations with the customer — upon arrival, during the work, and before leaving. I refer to this extra time as “overhead,” since it is not directly connected to the actual task itself.
Investing in quality tools and well-organized equipment cases can help reduce overhead time. When every tool has its dedicated place and is easy to access, less time is spent searching for the right equipment. This creates a more efficient workflow, saving both time and frustration.
Personally, I have several times had to remind customers that they are paying by the hour, or politely interrupt conversations during fixed-price jobs by finding creative ways to end them, such as asking where the bathroom is or suddenly needing to take an important phone call. In the most extreme case, despite repeated reminders that I charged for my time, an invoice ended up at 9,540 NOK for a job that actually took less than an hour and had originally been estimated at 1,590 NOK, simply because of long conversations and a lunch break before I left.
Factoring in a certain amount of overhead time is especially important when calculating quotes and fixed-price agreements, but it is also useful for time planning and resource management. If a job is estimated to take one hour, it is often more realistic to calculate 1.5 or even 2 hours once overhead time is included.
Salary: The Hidden Cost of Employees
The costs associated with having employees go far beyond their gross annual salary. A general rule of thumb is to add 20–30% on top of the gross salary to estimate the total cost of an employee. For example, if an employee earns 750,000 NOK annually, the total cost for the company may be closer to 1 million NOK once additional expenses such as holiday pay, pension contributions, insurance, and potential sick leave are included.
And this does not even include equipment such as computers, office space, software licenses, work clothing, company cars, or additional pension savings.
Hiring More Employees: The Reality Behind Increased Capacity
Training is often an underestimated cost when hiring new employees. In addition to direct costs for courses and training programs, there are indirect costs such as reduced productivity for both the new employee and the experienced employee responsible for training them. Studies show that it can take up to six months before a new employee becomes fully productive. During this period, the experienced employee may spend significant time mentoring, potentially reducing their own productivity by up to 20%.
When hiring a new employee, your capacity will not necessarily increase in direct proportion to the number of employees, especially not during the first year. Even if one employee can achieve 100% productivity, hiring a second employee does not automatically double production. Social dynamics and the additional management responsibilities that come with more people often result in a more realistic capacity increase of around 90%.
That said, there are exceptions. I have personally experienced situations where the results exceeded all expectations, and productivity multiplied simply by hiring one additional person. This shows that while overhead is often underestimated, the impact of expanding a team can in some cases be significantly greater than expected.
Technical Debt and Other Overhead Costs
Technical debt is a term developers know well, but it may be less familiar to managers and other employees. It refers to situations where shortcuts are taken, such as writing code quickly to meet a deadline without following best practices. This can lead to bugs and errors that need to be fixed later and can make future maintenance more difficult because documentation is missing or incomplete.
Technical debt may be necessary in order to launch a product quickly, but if ignored, it can limit a company’s ability to innovate and respond rapidly to market needs. One way to manage technical debt is to give developers regular time to clean things up, or to include an overhead allowance for technical debt in new projects.
Another example of overhead in development can be launch-related costs, such as training salespeople, support staff, and others who need additional time due to the product launch.
In Conclusion
Overhead costs, or indirect costs, are expenses that cannot be directly linked to the production of a specific product or service. Administrative expenses are a typical example because they apply to the entire business, not just one specific product line.
Overhead costs are an unavoidable part of running a business, and they can take many different forms depending on the context. Understanding overhead costs is important for both managers and employees. It helps leaders make informed decisions about staffing and budgeting, while also giving employees a better understanding of their value to the business
