What an effective multiplier is and how to calculate it

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.

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.

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.

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.

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.

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