Overview of overheads

An overhead is an additional cost a fee earner must carry to recover all other costs associated with employment other that his or her own salary.

In Timemaster, there are two types of overhead:

▪Non Productive Overhead

This recovers the cost of non-productive time such as holidays, sick leave, management time, etc.

▪Office Overhead

This recovers establishments costs (rent, heating, accommodation etc.), transportation costs, support service costs such as charges from external departments or firms (IT, legal charges etc.), and salaries of managerial and administrative staff.

Timemaster can calculate an hourly rate for all staff members from salary information. If you want to use the facility, then you need to specify the overhead on-costs that will be added to the hourly rates. If you are entering hourly rates manually, then you may ignore this section.

Non Productive Overhead

The Non-Productive Overhead is specified as a percentage of productivity. You should calculate the amount of lost time for each individual, subtract from 100% and enter the result.

For example;-

For a 37 hour week, 52 week year the total hours available would be 1,924.

For a 37 hour week, the hours per day figure is 7.4 hours

Less 8 days statutory holiday at 7.4 hours/day = 59.2 hours

Less 25 days holiday at 7.4 hours/day = 185 hours

Less 5 days sick allowance at 7.4 hours/day = 37 hours

Less 2 days training allowance at 7.4 = 14.8 hours

1,924 – 59.2 – 185 – 37 – 14.8 = 1,628, or 85%

This gives a productivity of 85%

Let’s further assume that everyone has 1.5 hours of admin or other lost time per week. (78 hours)

1,628 – 78 = 1,550 productive hours in the year.

1,550 as a percentage of 1,924 = 80%

Therefore you would enter 80% into the percentage productivity. If you wish to count management time as non-productive, then this figure would be further decreased for management staff.

Office Overhead

The office overhead contains all additional costs other than salary related costs. The normal way to calculate these is to set up a spreadsheet to itemise the costs, and then express them as a percentage of the fee earning staff.

Timemaster contains a spreadsheet-like entry form for you to itemise these items, in which case Timemaster will do all the calculations for you. Alternatively, carry out the calculations in an external spreadsheet and enter the total percentage on-costs into Timemaster.

You will probably already have a spreadsheet to calculate hourly rates, and if you have, you may compare it to the model shown below. Many people have their own way of working, but the example below shows how Timemaster works its calculations internally.

In the example above, two cost centres (Overhead Groups) have been shown; Overhead Group A and Overhead Group B. The staff belonging to each Overhead Group should be entered, as this may be an appropriate method of splitting common overheads, such as establishment costs between the two.

Most of the on-cost items above are straightforward entries which can be transferred directly from the budget book or company cash flow forecast. See the paragraph below on management overheads.

The percentage shown in row (J) is the value you need to enter into Timemaster.

Management Overhead

There are some circumstances when a manager or director of a company cannot be directly attributed to one Overhead Group. In other words, his (or hers) non-fee earning management time is spent split over two Overhead Groups, say in the above example a 60/40% split to groups A and B.

Timemaster caters for this situation by allowing any persons-non productive time to be allocated across multiple Overhead Groups on a percentage allocation basis.

So to enter the above values into Timemaster, you should create two Overhead Groups,

Here is an example of the steps you should take when calculating the staff hourly rates.

Within the actual costing procedure, there are only three rates that matter:

The Non-Productive Overhead and Office Overhead rates are used by the hourly rate calculations to arrive at the Resource and Recharge rates, but are kept in case analysis is required. The Prime Cost Rate is used (almost as a side issue) to cost overhead work. Theoretically the cost of overheads is free as it is recovered in the resource cost of undertaking productive work, however, by applying the prime cost rate we can calculate the true cost of overheads and compare it to the value we estimated via the productivity percentage.

Overhead hours x Prime Cost Rate should equal Productive Hours x Non-Productive Overhead rate.

Similarly, Productive Hours x Office Overhead Rate should equal the value used as the Office On-cost.