Many A&E firms calculate their overhead rate annually, then price every project on that number until the next budget season. Overhead moves faster than that. Indirect labor shifts week to week, and a rate that was accurate at the start of the year can put fixed fees below break-even by summer. The overhead rate sets your break-even calculation, billing rates, and profit on every hour your team logs.
The Formula and What It Tells You
Overhead Rate = Total Indirect Expenses ÷ Total Direct Labor Cost
Both numbers must be in dollars, not hours, and the result is a ratio written as a decimal or percentage. Using the indirect-cost calculation, $1,800,000 in indirect expenses divided by $1,200,000 in direct labor produces a 1.5, or 150%, rate. The resulting rate shows how much overhead each direct labor dollar must carry before the firm earns a profit. Direct labor means actual wage or payroll cost for hours coded to a project, not the employee's client billing rate.
Sorting Direct Costs from Overhead
Classification is where most firms distort their rate. Direct costs are incurred only because a project exists:
- Wages for hours charged to projects, including the portion of principals' time spent on project work, whether or not it's billed to the client
- Consultant fees
- Project travel, large-format printing, permit fees, and other project reimbursables
Reimbursables count as direct expenses even when a contract doesn't repay them; the test is whether the cost exists because of a specific project. The marketing overhead account is where unbillable hours quietly collect. Say a project manager spends an afternoon on QA/QC review of a structural package and codes it to marketing because nobody wants to bill the client for checking their own drawings. Those hours leave the denominator and land in the numerator, pushing the rate up from both sides.
Overhead is everything else it takes to run the firm. Indirect labor includes business development, training, staff meetings, and updates to CAD and BIM standards. Vacation, sick leave, PTO, fringe benefits, rent, utilities, insurance, software, marketing, and professional development also belong in overhead.
Indirect labor is the largest single component of overhead. Bookkeeping habits can sabotage the calculation when firms lump all payroll into one account or blend reimbursables into overhead instead of direct expenses. Split payroll into direct and overhead accounts first.
Benchmarks and the Definitions Behind Them
Benchmark data from 313 firms puts the rate at 167.6% before bonuses, and typical rates run 160% to 170%. Both figures exclude bonuses and divide by direct labor; the first is also struck before distributions. Before comparing your rate to a benchmark, confirm you're measuring the same thing:
- Bonuses: compare a pre-bonus rate with a pre-bonus benchmark
- Denominator: the major published A&E benchmarks use direct labor
- Revenue basis: strip consultant pass-throughs from net revenue
These choices can make a healthy firm look bloated or the reverse. An architecture firm carrying structural, MEP, and civil consultants on a single fee feels this hardest because the gross contract value has little to do with the labor its overhead must cover.
Government work adds a separate rate. Firms doing DOT or federal work need a FAR-compliant rate that strips unallowable costs such as entertainment and interest and is updated annually. Thresholds vary by state: North Dakota's state audit rules include a CPA audit requirement once active contracts exceed $250,000 in any 12-month period, while some DOTs accept a compilation. A firm can legitimately maintain separate operational, reporting, and FAR rates.
From Overhead Rate to Billing Rate
A firm's net multiplier must exceed one plus its overhead rate to turn a profit. Net revenue equal to that total is break-even.
At a 1.5 overhead rate, the chain runs three steps:
- Break-even multiplier: 1.0 + 1.5 = 2.5
- Target multiplier at 20% profit: 2.5 ÷ 0.80 = 3.13
- Billing rate: a hypothetical $57 direct labor rate × 3.13 ≈ $178 per hour
A published case study of a 65-person firm documented a 210% overhead rate that pushed break-even to 3.10, with an achieved multiplier of 3.19 and 5% profit. Under the simplified multiplier logic above, however, (3.19 − 3.10) ÷ 3.19 equals approximately 2.8% of net revenue, so the reported 5% uses a different profit definition or accounting inputs not represented by those multipliers. The diagnosis was low chargeability plus more overhead positions than the firm could support.
Keeping the Rate Under Control
Indirect labor is the lever that moves the rate fastest. Because direct labor sits in the denominator, falling utilization raises the rate even when spending stays flat. One point of utilization is worth about $225,000 in annual revenue at a 100-person firm.
A 2025 benchmark of 527 firms with 3 to 30 staff found staff utilization running from 69% to 94%, averaging 81.1%. A firm at the low end divides the same rent, software, and admin salaries by less direct labor, so its overhead rate looks bloated while its spending is ordinary. Check whether your recent fee proposals used a rate built on outdated utilization.
Recalculate monthly and track the payroll multiplier every billing period by team. That cadence hurts when hours live in a spreadsheet, expenses live in QuickBooks, and someone has to reconcile the two every month. Woodhull, an architecture firm using Monograph, reported 66% less administrative time, a 50% faster billing process, and 66% less budget overage after adopting the platform.
Monograph keeps time tracking, project budgets, and invoicing in one place, so the overhead check runs off hours the team already logged. Pull your past year of indirect expenses and direct labor, run the formula, and put the result on your monthly review agenda.
Stop Pricing Projects with a Stale Overhead Rate
Your overhead rate can move long before annual budget season returns. When indirect labor, project hours, and expenses live in separate systems, fixed-fee work gets priced on old assumptions. Monograph connects time tracking, project budgets, and invoicing, giving your team current information to review overhead and protect project margins. Replace the annual spreadsheet exercise with a monthly check, and book a demo.
Frequently Asked Questions
Do we really need to recalculate our overhead rate monthly?
Yes. Indirect labor and utilization can shift week to week, so an annual rate can become inaccurate within months. Recalculate monthly to catch changes before they affect new fees.
Should bonuses be included in the overhead rate?
You can calculate the rate before or after bonuses, but label it clearly and stay consistent. The published benchmarks in this article exclude bonuses, so compare your pre-bonus rate with those figures.
Are consultant fees and reimbursables part of overhead?
No. Consultant fees and reimbursables are direct expenses because they exist for a specific project, even when the client does not repay them. Keep them out of overhead and strip consultant pass-throughs from gross revenue.
Why is our FAR rate different from our pricing rate?
A FAR-compliant rate removes unallowable costs such as entertainment and interest, while an operational rate reflects the costs your firm uses for pricing. Maintain each rate consistently for its intended purpose.