The Hidden Cost of Overtime

In a recent client engagement I asked the Senior Operations VP about overtime in his area. He said there was some, but that it was relatively minor. I then went to Payroll and asked how much overtime was paid in the last pay period. The answer? $41,800. The VP was shocked. This translated to over $1,000,000 annually and this was just one division. All told, the company was incurring almost $3,000,000 in overtime annually. Once identified (and that is the first step) the team got on board to develop solutions that would dramatically reduce these costs. By the end of our engagement overtime was under $400,000 annually.

Overtime costs consist of two components –one is the extra time, and the other is the premium pay. Both represent inefficiencies and cost opportunity. Overtime needs to be identified, reviewed, and actioned.
Here are the five essential steps to control and limit overtime hours and cost:

1. Identification (you can’t manage what you don’t measure)
a. Identify how much is being spent and in which areas
b. Track it weekly or with each pay period
c. Break it out on the P&L, if significant
d. Ensure it has CEO visibility

2. Root causes (the why)
a. Identify the reasons – short or long term, customer impact, applicable legislation
b. Review the overtime approval process (in advance)
c. Assess if it is being used to “keep employees happy”
d. Inquire how it is budgeted
e. Identify if action has or is taking place and results

3. Avoid the excuse trap (there are plenty of them)
a. Watch out for indifferent acceptance
b. Watch for statements such as “the way we do business”
c. Watch out for past practices, entitlements, and embedded overtime
d. Watch for overtime creep – employees adding in small increments each pay

4. Not all overtime is bad (but most is)
a. Identify the extent that work is unpredictable and cannot be anticipated
b. If sporadic and truly unpredictable, overtime reduces the burden of FT staff
c. If predicable then consider contractors and part timers

5. Set the mandate (an overtime reduction mentality)
a. Establish overtime as a cost that should be avoided (CEO directive)
b. Address the root causes
c. Establish overtime cost targets
d. Monitor results and address missed targets

Overtime is one of those costs that can easily go undetected. If your organization incurs overtime and it is not being monitored or reported properly, it is most likely much larger than you imagine. Once identified, changes can be implemented and you will soon begin to realize the savings!

For more information on this and other helpful cost reduction techniques, please visit our website at or email Eugene at

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