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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    Amanda Reis Brana

    Great explanation and graphic! 

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    Margaret Logas

    Are the DSE and Net Multiplier the same thing?

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    Roberto Lapeyre

    Margaret, did you get your answer? I'm trying to figure that out myself.

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    Michael Ermann

    These two terms are the same thing. But net multiplier is not a real term outside of this exam. know that in ALL of the accounting profession, this difference is only a "thing" in our world. It's a distinction without a difference. In fact, if you google "Direct Salary Expense Multiplier vs Net Multiplier" THIS VERY THREAD HERE IS THE TOP RESULT THAT COMES UP!!!!! 

    Think about that. Of all the professional services that charge by the hour--lawyers, engineers, researchers, marketers, consultants of all stripes, PLUS the accountants that service them--this is only a question in those studying for the architecture licensing exam?

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    Sarah Hovsepian

    Great info, checkout this video. Enjoy!

    https://m.youtube.com/watch?v=KlaXmlPzFdQ&t=72s

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    Tingting Lyu

    Is Revenue Factor same thing as DSE and Net Multiplier?

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    Michael Ermann

    No…they are different….DSE and net multiplier are “dollars charged to the clients per dollar of direct labor actually working on the projects”…revenue factor is “dollars charged to the clients per dollar of TOTAL labor (direct+indirect)”

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    Jon Krizan

    Does the "Average Billing Rate" include the Net Multiplier?  

    From my understanding you calculate your Billing Rate by multiplying your "Hourly Rate" by your "Net Multiplier" (i.e. $30 x 3.0 = $90).  And you acquire your "average" by averaging all of your Billing Rates together.  However, in the PjM practice exam there is a question that requires you to multiply the Net Multiplier by the "Average Billing Rate"...(this seems very counter intuitive) 

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    Michael Ermann

    Will you copy-paste the question and answer?

     

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    Jon Krizan (Edited )

    Thank you Michael! I really appreciate your help.  

    I tried pasting a screen shot, but it got stuck on pending approval.  

    So, If you have the time, It's Question 7, on page 6 : https://www.ncarb.org/sites/default/files/ARE-Practice-Exam-Project-Management.pdf

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    Christopher Hopstock

    The answer to that question is incorrect and you're on the right track - you shouldn't multiply a billing rate by a net multiplier because that multiplication has already been done - billing rates are hourly rates x net multiplier.

    This question should be adjusted to refer to $50 as the average hourly rate, not billable rate.

    Chris Hopstock RA
    Black Spectacles
    ARE Community

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    Jon Krizan

    Thank you Chris!  

    That's concerning, but good to have clarification. 

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