Overhead Costs in a Service Industry
Calculating overhead costs as part of running a service business is a key to determining out how much to charge your clients. Once you add indirect costs to the cost of providing the service itself, it’s easier to come up with an hourly rate or project fee. In addition, taking a close look at your overhead costs helps determine where to expenses if you want to improve your bottom line.
Overhead costs related to your support staff include the salaries and benefits you pay to employees that are not related directly to a project. This includes paying your administrators and clerical staff as well as accounting and human resources personnel. Tally up the cost of any benefits you provide to these staff members, such as healthcare and dental insurance, vacation and sick time, contributions you make to retirement programs and training, to get the complete picture.
Materials commonly used to provide your services to all clients, such as soap, rags and water used to provide car washing services, are considered overhead expenses. As you calculate your materials overhead costs, do not include special materials that are charged to just one client. For instance, an accounting firm does not charge a client for the software used to calculate taxes. But if the firm installs bookkeeping software on the client’s computer so they can better track expenses and payments, the program is billed to the client as a direct cost.
Indirect costs are a necessary part of doing business, and are considered overhead costs. Include the cost of leasing space for your business as well as utilities, such as phone, electricity, gas, water and sewage. Other indirect costs include computer software and hardware, printers and phones. All of the furniture in your business, including reception area and conference room tables and chairs, go in this category. Marketing and business development activities are another indirect cost, so tally up the expense of advertising, promotions, networking and referral programs.
Competitively pricing your services may make it necessary to cut overhead expenses. If you still need to buy office furniture, look for used business furniture at stores or in online classifieds. Consider a refurbished copier to cut costs by half from buying a brand new machine. Rather than bringing on full-time staff, hire contractors or temporary workers so you don’t have to pay benefits or calculate payroll.