Costing the overhead for a new project

Costing the overhead for a new project involves estimating and allocating the indirect costs that are not directly related to the project's specific tasks or activities. Here are some steps to help you estimate and allocate overhead costs for a new project:

1. Identify overhead costs: Start by identifying the overhead costs that are relevant to your project. These may include:
   • Salaries and benefits for administrative staff, such as accounting, HR, and IT personnel.
   • Rent, utilities, and maintenance costs for office space.
   • Insurance premiums, such as liability, property, and workers' compensation insurance.
   • Depreciation and amortization of assets, such as equipment, vehicles, and software.
   • Travel and training expenses for employees.
   • Miscellaneous expenses, such as supplies, equipment, and software.
2. Determine the overhead rate: Calculate the overhead rate by dividing the total overhead costs by the total direct costs (i.e., costs directly related to the project). This will give you the overhead rate, which is a percentage of the direct costs.
3. Estimate the direct costs: Estimate the direct costs for the project, including labor, materials, and equipment. This will help you determine the total direct costs and the overhead rate.
4. Apply the overhead rate: Apply the overhead rate to the direct costs to estimate the total project costs, including overhead. This will give you the total project budget.

Example:

Let's say you're estimating the costs for a new software development project. The direct costs are estimated to be $100,000, which includes labor, materials, and equipment. The overhead costs are estimated to be $50,000, which includes salaries, benefits, rent, utilities, and insurance premiums.

To calculate the overhead rate:

Overhead costs: $50,000 Direct costs: $100,000 Overhead rate: $50,000 / $100,000 = 0.5 or 50%

To apply the overhead rate:

Direct costs: $100,000 Overhead rate: 0.5 or 50% Total project costs: $100,000 + ($100,000 x 0.5) = $150,000

In this example, the total project budget would be $150,000, which includes the direct costs of $100,000 and the overhead costs of $50,000.

Tips and considerations:

• Use historical data: Use historical data to estimate overhead costs, if available.
• Consider industry benchmarks: Research industry benchmarks to determine a reasonable overhead rate for your project.
• Adjust for project-specific factors: Adjust the overhead rate based on project-specific factors, such as the complexity of the project, the number of employees involved, and the location of the project.
• Review and revise: Review and revise the overhead rate regularly to ensure it remains accurate and relevant to the project.

By following these steps and considering these tips and considerations, you can estimate and allocate overhead costs for your new project and ensure that your project budget is accurate and complete.