Clarification between Overhead multiplier, Net Multiplier, and Break-Even Multiplier

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    Michael Ermann

    For ease of visualizing, let's assume that our firm pays its architect a generous $100 per hour.


    Overhead rate: If our firm spends $150 on non-billable expenses (like AIA conferences) for every $100 it spends on staff salaries for billable client work, than we say that our overhead rate is 1.5 (pretty typical for a healthy firm)


    Break-even rate: In the example above, for every $100 we pay in direct (billable time) salary, we need to charge the client $250 to cover both the $100 staff salary and the $150 overhead. We then derive a break even rate of 2.5. That means that for every salary dollar we pay for our architect's billable time, we have to charge 2.5 dollars just to break-even (this is still before we add more to the client bill to account for profit). Break-even rate always equals Overhead rate + 1.0.


    Net multiplier: If we charge the client $300 for the $100 we paid our architect, our net multiplier is 3.0 (also typical for a firm). This allows for us to pay our architect $100 for the work, to pay the $150 for overhead (things like AIA conference attendance), and leaves us with $50 left over for profit.

     

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    Kimberly Dela Cruz

    Thank you! That really helps!

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