Where the margin goes: direct costs or overhead?

The problem

At year-end the profit is thinner than the year before. But where did the margin go? Into the costs each job switches on, or into the ones that run no matter what?

They're two different worlds. Keep them in one pile and you'll never know.

The first step is to separate them: direct costs on one side, overhead on the other.

Direct costs and overhead: two different natures

Direct costs are born from the work. They move with the jobs: work more and they rise, stop and they fall. Materials, subcontractors, site labour, rentals. Every euro is attached to a specific job.

Overhead runs regardless. Rent, admin, software, the office. It's there with ten open jobs and it's there with one. It's the cost of existing, not of producing.

Why the distinction matters:

• Job margin (revenue minus direct costs) tells you whether the work itself pays.
• Subtract overhead and you get EBITDA: what's actually left.

If the margin falls, the right question is: are the direct costs blowing up (a jobs problem: pricing, rework, subcontractors), or has overhead grown too much (a fixed-cost problem)? The answer changes what you do on Monday morning.

Try it here

This is the P&L of a construction company — sample numbers. See the two natures side by side and open the direct costs to find where they pull.

Here's what the numbers say:

• Revenue €2,520,000 (+5%): looks like a good year.
• Direct costs €1,770,000, but up +18%. They're variable, per job: materials (€651,000), subcontractors (€702,000), site labour (€336,000), rentals (€81,000).
• Overhead €450,000, just €20,000 more than last year. The fixed costs are under control.
• Result: job margin drops to €750,000 (−€150,000 versus last year) and EBITDA stalls at €300,000.

Overhead didn't eat the margin. Direct costs did — open the subcontractors to see which one. Without the distinction, you'd have cut the office instead of renegotiating a subcontract.

Do it on your own data

Your P&L holds the same question: direct or overhead? The answer is already in your numbers, you just need to separate them.

Want a P&L that tells direct costs from overhead, on your real data? Discover LoomX Analyst — your analyst, in an app — or let's talk: 30 minutes, no sales follow-up.

Read also: Management control for your business: the practical guide and Revenue is growing but profits aren't? Here are 3 hidden causes.