Why indirect costs often don’t hurt until it’s too late

Indirect costs rarely cause problems on their own. They’re usually not the major investments for which a business case is written. They’re small, logical decisions that add up over time: an extra subscription, an external service for that one specific occasion, or a new software license for that new colleague.

Justified on their own. Together, they create a structural problem.

The result: Finance doesn’t see the costs until they’ve already been incurred. Forecasts become less reliable, budgets are explained after the fact, and the question “Where is our money actually going?” remains difficult to answer. And that affects not only operations but, above all, strategic management.

The problem isn’t so much that these costs are incurred, but that you can’t manage based on expenses that have already been made—you’re not in control. And even if the numbers are correct, they come too late to make any adjustments. And that’s precisely what makes indirect costs a strategic issue.

What exactly are indirect costs?

Indirect costs are costs that cannot be directly allocated to a single specific product, project, or service, but which are necessary for the organization to function. Examples include:

• Facility costs
• IT and software
• External services
• Administration
• Facilities and overhead

Precisely because they aren’t directly linked to output, they often fade into the background. But for Finance, these are exactly the costs that reveal how mature the organization’s financial structure is. After all, “not directly attributable” doesn’t mean “uncontrollable.” It simply means organizing and managing things differently.

Examples of indirect costs: recognizable and persistent

Indirect costs often fall into categories that no one is really “against,” but that no one manages centrally. And that leads to indirect costs that may not be necessary, but that stubbornly keep recurring without you having any control over them. Consider:

• Software licenses that once made sense but are now never used.
• Expense reports from employees who “quickly” purchase office supplies on their own.
• Recurring costs incurred across different departments that could be managed more cost-effectively at the central level.

Taken individually, these aren’t staggering amounts and often aren’t even major points of discussion. But when added together, all these indirect costs often make up a significant portion of total expenses.

The question is usually not even “Are these costs necessary?” but “Do we have structural control over them?”

Direct versus indirect costs: the difference seems simple

The distinction between direct and indirect costs seems clear:

Direct costs

• Can be directly allocated
• Often budgeted in advance
• Relatively predictable

Indirect costs

• Support the organization
• Are spread across departments
• Often don’t come to light until after the fact

The real difference lies not in the definition, but in the degree of control. Indirect costs require different agreements, different ownership, and a different timing for oversight. And that’s often where the problem lies.

Why indirect costs are so difficult to control

The challenge rarely lies in a lack of willingness. It lies in how organizations are structured. Indirect costs arise:

• Decentralized within the organization
• Without prior authorization
• Outside of established processes

Departments act based on their own interests and perspectives. But Finance bears the responsibility.

This tension makes indirect costs complex. Add manual processes and limited transparency to the mix, and you end up with a situation where Finance primarily explains things after the fact rather than steering them in advance.

For CFOs, this isn’t an operational problem, but a governance issue.

The risks of unmanaged indirect costs

When indirect costs remain structurally unmanaged, the consequences go beyond slightly higher expenses. Consider:

• Reduced reliability of forecasts;
• Budget overruns with no clear cause;
• Pressure on the accounts payable department due to exceptions;
• Additional questions during audits;
• Reduced confidence in management information.

The biggest risk? That financial management becomes reactive rather than predictive.

The moment of insight for Finance

Generally speaking, indirect costs ultimately end up with Finance. Not because Finance causes them, but because the invoice is the first tangible moment when those costs become visible.

For Finance, this is an important signal. Because if insight only arises when the invoice arrives, the opportunity to take corrective action has long since passed. This also explains why indirect costs often lead to a heavy workload, exceptions, and investigative work. The invoice reveals what was not previously recorded.

Gaining control of indirect costs: a strategic starting point

Gaining control doesn’t have to be complex, but it does require clear decisions. As a CFO or financial manager, you want to:

• Make costs visible as early as possible
• Explicitly define ownership
• Agree on clear frameworks for expenditures
• And limit exceptions as much as possible.

Only then does technology become a support rather than a driving force.

Many organizations arrive at a broader discussion about spend management at this point. Not as an end in itself, but as a way to create structural insight and predictability—without every expenditure becoming a project.

Transparency as a prerequisite for control

Without transparency, there is no control. It’s that simple. Transparency doesn’t mean micromanagement, but rather insight into patterns:

• Where do indirect costs arise?
• Which costs are structural?
• Which costs are creeping up unnoticed?

For Finance, this makes the difference between explaining things after the fact or making adjustments in advance. And that difference determines how scalable and manageable the organization is.

In conclusion: manage or explain?

Indirect costs don’t just disappear. They’re part of every organization.

The only question is: do you view them as something you explain after the fact, or as something you consciously manage? For many CFOs, this is the tipping point between reacting and taking control.

What steps will you take to make indirect costs a strategic part of your financial management?

💡Recommended reading: “Flow in Finance: The Next Step in Your P2P Process” white paper