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Overhead: Definition and Meaning
Definition
Overhead is the indirect business cost required to operate a company, such as rent, administrative payroll, insurance, utilities, technology, and office expenses.
Why It Matters
Understanding overhead is important for budgeting, pricing, profitability analysis, staffing decisions, and long-term planning. A company must generate sufficient gross profit to cover overhead and still produce an acceptable return.
For contractors, management may analyze how overhead relates to volume, labor, project activity, and estimating assumptions. The appropriate treatment and allocation of overhead depend on the company’s accounting and management-reporting needs.
Example
Office rent and administrative staff salaries are common overhead costs because they support the business broadly rather than one specific project.
Related Terms
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