How to Calculate Overhead Multiplier
Knowing your overhead multiplier helps you know what to bill your clients to cover your overhead cost as a firm.
Every firm operates differently - some firms re-calculate their overhead multiplier quarterly while some do it yearly.
Either way, re-visiting your overhead costs regularly will help you set a better billing rate for your design services and allow you to run a profitable firm.
1 - Set Your Direct Labor Cost
The first thing you need to know is your Direct Labor Cost. This is the total amount of your employee’s annual compensation that can be billed directly to your clients.
If you have 5 employees with $100,000 salary each, your total Direct Labor Cost would be $500,000.
Note: If you're a Monograph Customer, this is the total compensation for all employees who work on billable projects in Monograph.
2 - Collect Your Overhead Cost
Next you want to know your Overhead Cost. Let's break it up into 2 types:
1 - Overhead Labor Cost
Overhead Labor Cost includes your employee’s annual compensation that cannot be billed to clients such as an admin or marketing team member.
If you have a few admins or team members that do not bill to any projects making a total of $400,000 - that's your Overhead Labor Cost.
Note: If you're a Monograph Customer, include compensation for any employees that do not work on billable projects, as well as employees that are not inside Monograph under your Overhead Labor Costs.
2. Overhead Expenses
Overhead Expenses include any annual expenses that cannot be reimbursed from projects such as:
- Employee fringe benefits
- Marketing expenses
- Software costs
Now that you have collected the Overhead Labor Cost and Overhead Expenses, you can add them together to get your Total Overhead Cost.
3. Total Overhead Cost
Then we just need to add all your overhead costs together to get your Total Overhead Cost
Using the example above - if your Overhead Labor Cost is $400,000 and all of your expenses add up to another $350,000.
Your Total Overhead Cost would be…
$400,000 (Overhead Labor Cost) + $350,000 (Overhead Expenses) = $750,000 per year
3 - Calculate Your Overhead Multiplier
Next let’s calculate your Overhead Multiplier.
Your Overhead Multiplier gives you a number to multiply your employees' hourly rate by to cover all of your overhead costs.
To calculate your Overhead Multiplier, divide the Total Overhead Cost by your Total Direct Labor Cost.
For example, Overhead Multiplier = $750,000 (Total Overhead Cost) / $500,000 (Total Direct Labor Cost) = 1.50
This means you need to charge your client $1.50 to pay for $1 of your overhead expenses.
Keep in mind that most firms have a target Overhead Multiplier of 1.50 to 1.75.
So if you're going above this range, it's time to eliminate some of your overhead expenses to get to the ideal range.
Using Overhead Multiplier inside Monograph
If you're a Monograph customer, you can input the Overhead Multiplier under the Organization tab inside Settings. This will help you get an accurate view of your profitability in our Reports.