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. The important thing is that companies must factor in the true labor costs to measure its profitability. Your bill rates must be loaded with the gross wages, overhead costs (rent, utilities, depreciation, marketing, etc.) and target profit. Similarly, your labor costs must be loaded with the payroll costs, benefits, payroll taxes, insurance costs, etc. that you pay for your employees.
While the Break-Even Multiplier calculates the multiple needed to cover all business expenses including overhead expenses and direct labor costs, the Overhead Multiplier only shows the multiple needed to cover the overhead expenses. For example, if a company's overhead multiplier is 1.66, it means that for every $1 spent on direct labor, the company incurs $1.66 in overhead expenses.
This metric illuminates if you need to cut costs. If your Overhead Multiplier is too high, it might mean you are spending too much on overhead expenses like rent, software, overhead employees, etc. Often this term is confused with the break-even rate. When in doubt, make sure to check what data is being used to make the calculation. As these two metrics are closely related it is most important to know the break even rate of your business at all times. You can simply subtract 1 to get the Overhead Multiplier.
Overhead Multiplier = Overhead Expenses / Direct Labor Cost
Or Break-Even Rate - 1
So Overhead Multiplier indicates how much above someone’s base cost you have to charge to
cover operational expenses.