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Firm economics

What an effective multiplier is and how to calculate it

The effective multiplier is net service revenue divided by direct labor cost. It shows how many dollars of fee each dollar of project salary produced. Compare it with the breakeven multiplier, which is 1 plus the overhead rate: above breakeven the firm makes a profit on its labor, below it the firm loses money.

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Updated Oct 14, 2026

The inputs

Both inputs need careful definitions, because the multiplier is a ratio and small definitional changes move it a lot.

  • Net service revenue: gross fees minus subconsultant costs and reimbursable expenses passed through to clients. It is the revenue the firm's own people earned.
  • Direct labor cost: the salary cost of hours charged to projects, at each person's raw hourly cost, before benefits and other overhead.
  • Overhead: every other cost of running the firm, including benefits, payroll taxes, unbillable time, rent, and software.
  • Overhead rate: total overhead / direct labor cost.

Worked example: the firm-wide multiplier

A firm billed $2,600,000 in a year. Of that, $300,000 was subconsultant fees and $100,000 was reimbursable expenses. Direct labor cost was $700,000 and total overhead was $1,050,000.

  • Net service revenue: $2,600,000 - $300,000 - $100,000 = $2,200,000.
  • Effective multiplier: $2,200,000 / $700,000 = 3.14.
  • Overhead rate: $1,050,000 / $700,000 = 150 percent.
  • Breakeven multiplier: 1 + 1.50 = 2.50.
  • Profit: $2,200,000 - $700,000 - $1,050,000 = $450,000, or 20.5 percent of net service revenue.

Breakeven and target multipliers

At the breakeven multiplier, net service revenue exactly covers direct labor plus overhead. Each dollar of direct labor carries $1.50 of overhead in the example above, so it must bring in $2.50 just to break even.

To set a target, add the profit you want on top of total cost. For a 15 percent profit on cost: 2.50 x 1.15 = 2.875. A project priced to achieve that multiplier covers its labor, its share of overhead, and the planned profit.

Worked example: two projects

The same calculation works project by project, using the firm's overhead rate to allocate overhead.

  • Project A: net service revenue $90,000, direct labor $32,000. Multiplier 90,000 / 32,000 = 2.81, above the 2.50 breakeven.
  • Project B: net service revenue $40,000, direct labor $18,000. Multiplier 40,000 / 18,000 = 2.22, below breakeven.
  • Project B in dollars: overhead allocated is $18,000 x 150% = $27,000, total cost $18,000 + $27,000 = $45,000, so the project lost $45,000 - $40,000 = $5,000.

Billing multiplier versus effective multiplier

A billing multiplier is the rate charged divided by a person's raw hourly cost. The effective multiplier is what the firm actually achieved after write-downs, fixed-fee overruns, and discounts.

Worked example: a person with a $50 hourly cost billed at $160 has a billing multiplier of 160 / 50 = 3.2. If 10 percent of their time is written down, the firm realizes $144 an hour and the effective multiplier is 144 / 50 = 2.88. The gap between the two is the realization problem, and it is usually where profit goes missing.

Where Hubity fits

Hubity keeps timesheets, expenses, invoicing, and profit and loss in one workspace, so the revenue and the labor behind a multiplier come from the same records.

See how it works

Terms used here

  • Multiplier
  • Breakeven multiplier
  • Net service revenue
  • Direct labor cost
  • Overhead rate
  • Realization rate
  • Write-down
  • Utilization rate

Work it out on your own numbers

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Billing rate and multiplier calculator

From salary, overhead and profit to a breakeven rate, a billing rate and the multiplier behind each.

Fee proposal estimator

Hours by phase or role, times rates, plus contingency and expenses, with the blended rate.

Utilization rate calculator

Billable hours against available hours, net of time off, with the weekly hours a target needs.

Common questions

  • Gross revenue includes subconsultant fees and reimbursables that the firm passes through at or near cost. Including them inflates the multiplier without reflecting anything the firm's own people earned.
  • Not in the usual definition. Benefits and payroll taxes sit in overhead, which is why the overhead rate is often above 100 percent. Whichever way you define it, keep it consistent across periods.
  • Lower utilization moves salary from direct labor into overhead, which raises the overhead rate and the breakeven multiplier. The same fee then covers less of the firm's cost.

More on firm economics

How to calculate utilization rate and set targets by role

How to calculate utilization rate (billable hours divided by available hours), why targets differ for principals and staff, and how to set them by role.

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