Enter your annual costs
How it is calculated
Overhead rate = indirect operating costs ÷ direct labor cost. Cost multiplier = (direct labor cost + indirect operating costs) ÷ direct labor cost. Revenue multiplier = target labor revenue ÷ direct labor cost when target labor revenue is entered.
Before entering revenue, ask your firm accountant which report line matches this input. A software publisher's Method M documentation calculates an estimated multiplier from estimated labor revenue divided by estimated labor cost. Its project reporting documentation separately defines net revenue after subtracting nonlabor direct and reimbursable expenses from total revenue. It also distinguishes realization using labor at billing rates from an effective multiplier using labor at cost rates. Before comparing this output with a report labeled multiplier, have your accountant reconcile the numerator and denominator.
Cost classifications vary by firm and accounting method. These estimated ratios do not establish an appropriate billing rate or guarantee cost recovery. General education only, not engineering, legal, tax, or investment advice. Licensed PE judgment and local codes govern engineering work.
The software publisher's Method M help example describes a project with budgeted overhead of 175 percent and a breakeven multiplier of 2.75, comprising 1.75 for overhead and 1.00 for labor. That example illustrates the relationship within the documented method. The same method calculates earned revenue using direct labor cost multiplied by a multiplier, with reimbursables added separately. Before using this calculator in a rate discussion, ask your firm accountant which costs the inputs cover and how reimbursables are treated in the firm's reports.
Example scenario
A hypothetical civil engineering firm owner enters $800,000 in direct labor cost, $400,000 in indirect operating costs, and $1,600,000 in target labor revenue. The calculator reports 50% overhead, a 1.50 cost multiplier, and a 2.00 revenue multiplier. The figures come from hypothetical firm inputs, not industry benchmarks or recommended billing targets. They can help the owner discuss how indirect costs relate to direct labor and how a revenue target compares with that cost base. The owner can use the ratios to identify questions for a budgeting or rate review, but they do not establish an appropriate billing rate or guarantee cost recovery. Next, confirm that labor and indirect costs are classified consistently with the firm’s accounting method, check the period covered by each input, and compare the target with actual labor revenue and operating results.
Use the result to frame the management discussion. A software publisher recommends that management set and periodically reassess multipliers used in its Method M. A firm president identifies net revenue and net income as measures to monitor alongside gross profit. The software publisher's reporting documentation also separates earned revenue awaiting billing from billed amounts in accounts receivable. Ask your firm accountant who owns the multiplier review, how the target compares with operating results, and whether unpaid revenue is awaiting an invoice or payment.
Sources and further reading
- Deltek Vision 7.6 Revenue Method M
- Project Earnings Columns Tab
- Growing Your Civil Engineering Firm: Being Proactive, Not Reactive: Ep 178 (2021)
Method, inputs and limits
Purpose
Calculate overhead rate and cost multiplier from direct labor and indirect costs, with an optional revenue multiplier.
Inputs and defaults
Direct labor cost: $1,000,000; indirect operating costs: $1,200,000; target labor revenue: $2,400,000. Direct labor must exceed zero; other inputs are nonnegative. A zero target suppresses the optional revenue multiplier.
Formulas
Overhead rate = indirect costs ÷ direct labor cost × 100%. Cost multiplier = (direct labor cost + indirect costs) ÷ direct labor cost. Revenue multiplier = target labor revenue ÷ direct labor cost.
Outputs
Overhead rate, cost multiplier, optional revenue multiplier.
Test cases, expected values
- Defaults: 120% overhead; 2.20 cost multiplier; 2.40 revenue multiplier.
- $800,000 direct labor, $400,000 indirect costs, $1,600,000 target revenue: 50% overhead; 1.50 cost multiplier; 2.00 revenue multiplier.
- $1,000,000 direct labor, $0 indirect costs, $0 target revenue: 0% overhead; 1.00 cost multiplier; revenue multiplier not shown.
Disclaimer
Cost classification depends on firm accounting methods. These ratios do not establish an appropriate billing rate or guarantee cost recovery. General education only, not engineering, legal, tax, or investment advice.
