The Real Reason Overheads Feel “Too High”

Introduction - Overheads Feel “Too High”

Many construction and engineering business owners believe their overheads are out of control. Rent feels expensive, management salaries look heavy, and fixed costs seem to rise every year. The instinctive response is to cut costs, delay hiring, or strip back investment.

At Jones Financial Accounts (JFA), we regularly find that overheads are not actually the problem. In most construction and engineering businesses, overheads feel too high because they are being absorbed inefficiently.

The issue is not what you spend, it is how effectively the business converts that spend into productive output.

This distinction is critical. Cutting overheads weakens capability. Improving utilisation and operational efficiency strengthens margins without reducing capacity.

Overheads Inflated by Low Utilisation

Overheads are largely fixed. Office costs, management salaries, vehicles, insurance, software, and compliance do not fluctuate much month to month. What does fluctuate is how many productive hours those costs are spread across.

When engineer utilisation drops, overheads appear inflated. The same £500,000 of fixed costs absorbed across fewer billable hours dramatically increases the cost per hour. This makes jobs feel unprofitable even when pricing has not changed.

Many businesses respond by cutting overheads, but this rarely solves the root cause. The more effective approach is to increase the number of productive hours absorbing those costs. Improving utilisation by even 5–10% can materially reduce overhead pressure without cutting spend.

This requires better planning, clearer scopes, reduced downtime, and more consistent workflows, not fewer people or less support.

Cost per Hour Misconceptions

One of the most common financial errors we see is calculating cost per hour using theoretical capacity rather than reality. Businesses assume engineers are productive for 40 hours a week, 52 weeks a year. That assumption is almost never true.

Holidays, sickness, training, travel, admin, rework, and waiting time all reduce productive hours. When these realities are ignored, cost per hour is understated. Jobs are priced too cheaply, margins disappear, and overheads feel excessive.

A more accurate approach starts with realistic assumptions. Once true productive hours are used, cost per hour increases, but pricing improves and margins stabilise. T

his is not about making the business more expensive; it is about making it sustainable.

For a wider explanation of how assumptions affect financial reporting, see:👉 https://www.jonesfa.co.uk/blog/how-to-read-a-profit-and-loss-report-in-10-minutes

Productivity vs Headcount Myths

When overhead pressure builds, many businesses assume they need more people. More engineers to spread workload. More managers to create control. More admin to keep up with demand.

In reality, adding headcount without improving productivity usually makes the problem worse. Each new hire adds salary cost, management time, systems, vehicles, and indirect overhead.

If output per person does not improve, overhead absorption weakens further.

The more effective route is to increase output per head before increasing headcount.

This means improving planning accuracy, reducing interruptions, improving information flow, and tightening job control. Businesses that focus on productivity first often unlock growth capacity without hiring, protecting margin and cash flow at the same time.

Operational Efficiency Over Cost Cutting

Cost cutting is visible and immediate. Operational efficiency is quieter but far more powerful. Cutting training, systems, or management support may reduce overheads in the short term, but it usually increases inefficiency elsewhere.

Operational inefficiency shows up as rework, delayed invoicing, unclear scopes, duplicated effort, and firefighting. Each of these reduces productive output and increases overhead pressure without appearing as a single obvious cost.

Improving efficiency focuses on how work flows through the business. When engineers have the right information at the right time, jobs are delivered faster, invoices go out sooner, and overheads are absorbed more effectively.

This is where real margin improvement happens.

Practical tools to review utilisation, workflow, and overhead absorption are available here:👉 https://www.jonesfa.co.uk/resources

Practical Steps to Reduce Overhead Pressure

Start by measuring utilisation honestly, based on reality rather than expectation.

Review productive hours weekly. Recalculate cost per hour using realistic assumptions.

Next, review where time is being lost, waiting, rework, poor planning, or unclear scope. These inefficiencies often cost more than any single overhead line in the P&L.

Finally, stop judging overheads in isolation. Overheads only make sense when viewed against output. When leadership focuses on productivity and efficiency, overheads stop feeling like a burden and start behaving like an investment.

Key Takeaways

• Overheads feel high when utilisation is low

• Incorrect cost-per-hour assumptions destroy margin

• Adding headcount without productivity worsens the problem

• Operational efficiency beats cost cutting every time

If your overheads feel out of control, the problem may not be the costs, it may be how effectively your business turns them into productive output.

Wrapping up today's insights, tomorrow we simplify another accounting challenge.