Firm Overhead is a Direct Expense?

Hi! First time poster here.

The commentary for one of the practice exam questions states “direct expenses include firm overhead, computers and equipment, as well as other cost of doing business, as well as reimbursable expenses such as printing, mileage, etc.”

I was always under the impression that overhead was an indirect expense - expenses unrelated to a project such as rent, insurance, marketing, utilities, etc.

Can someone please explain?

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Hi @mroby ,

Do you have any idea which practice exam form this was on? I’d like to double check this question it to make sure we don’t have a typo on it – I’m thinking it is meant to say “direct expenses exclude…”

You are correct, overhead is an indirect expense. The Architect’s Handbook of Professional practice indicates that that the terms “indirect expense” and “overhead” are often used interchangeably.

Thanks!

It’s a typo. I just looked again to make sure my eyes weren’t deceiving me. It can be found in Form 1 question 22 of 65 in pcm practice exams. The question begins with “An architecture firm determines that a new mixed-use project must bring in 20%…”. Per policy I’ll refrain from including a screenshot. One of the answers to select is “direct expenses” and the error is found in the commentary.

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Awesome, thank you for pointing this out and your patience @mroby ! I’ll direct our quality control team to this question and we will get it fixed up ASAP.

overhead is an indirect expense. but the net multiplier (net revenue / direct labor(salaries)). the net multiplier accounts for fringe benefits, indirect labor, overhead, and profit. firms typically use about a 3 for their net multiplier. so overhead gets tacked on to the billing rate(s) so the lights can get paid. it gets directly applied to a person’s billable hours that is directly charged to a project. The way overhead is an indirect expense, in my view, is that it was incurred as an indirect expense. the architect factors a portion of it to billable hours to recoup that payment (utilities, rent, etc.) Does this sound correct?

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Hi @jestes

I believe what you are describing is correct, although I might phrase it slightly differently.

Overhead is a sort of synonym for indirect expenses, and the two terms are often used interchangeably. They both are words used to describe all non-project related expenses, such as utilities, software licenses, office supplies, etc.

When you are establishing your net multiplier and fees you want to factor in what your overhead (or indirect expenses) are. You want to balance your budget by matching your total expenses with your total revenue, plus any profit you want to target. To do so, when establishing your fees you want to be sure you are accounting for all expenses, both direct and indirect!

If you want to learn more I’d check out page 409-417 of the Architect’s Handbook of Professional Practice.

I also think this presentation from AIA Florida does a great job of showing examples and describing how all these financial terms are used!

Hope this helps!
-Darion

Thank You, Darion! This does help

I can not wrap my mind around this: How is depreciation and accounts payable added to profit to equal cash from operations?

Operating Profit 15,000
„ less increase in Accts Receivable -30,000
„ plus depreciation 5,000
„ plus increase in Accts Payable 16,000
„ Total from Operations: 6,000

Hi @jestes ,

That is from the cash flow statement. In it, they are counting the money which has left their accounts as the positive number, sort of the inverse of the balance sheet is calculating them. Take a look at the balance sheet and see how it relates to these values!

The cash flow statement is taking the 15,000 operating profit as a starting point. It is showing the 30,000 accounts receivable (money owed to the firm, but not yet paid) as a negative number because it is flowing into the firm. Accounts payable (money the firm owes) is positive in this case because it is money flowing from the firm. Same as the depreciation.

So, you take:
15,000-30,000+16,000+5,000 = 6,000 cashflow
The total amount of cash leaving the firm is $6,000.

You can read more about cash flow statements here:

Honestly, for some of these financing concepts websites like Investopedia can be more easily understood than other, architecture specific sources in my opinion!

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wow this is helpful…I was thinking of profit as an asset, not cash flowing out of the company’s account. yes, this makes sense now.

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I’m glad I could help! :slightly_smiling_face:

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