Calculating overhead multiplier

There are companies calculating overhead multiplier (OHM) or overhead factor (OHF) every quarter while others might do that yearly. Different companies have different procedures and policies and, therefore, different ways of handling time entry and billing.

Generally, companies calculate OHM and Bill Rate as:

Overhead Multiplier = (Total Expenses + Allowance for Bad Debt) / (Direct Project Labor + Direct Project Expenses)

where Total Expenses = (Total Direct Expenses + Indirect Expenses) and include overheads, operating expenses, salaries, payroll taxes, insurance, etc.

OR 

OHM = Total Expenses / Total Payroll Expenses

Bill Rate = Direct Personnel Expense x (Overhead Multiplier + Profit)

Some government agencies will not allow any allowance for bad debt or marketing and limit profit. Direct Project Labor can be either salary expense or Direct Personnel Expense, depending on your practice or your contracts. Some companies do these calculations from the General Ledger and set up special accounts for Direct Labor and Indirect Labor. They use a simple formula to calculate Overhead Rate:

OHM = Total Indirect Expenses / Total Direct Labor

where Total Indirect Expenses are the company overheads

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