There is no single right way to do this but there are rules of thumb
and in some cases rules if say you consult to the federal government.
There tend to be 2 types of indirect costs -- overhead and G&A
(general and administrative). Overhead includes indirect costs that
are closely aligned with completing the project such as rent,
utilities, computers, phones, LAN support, fax machines, general
office supplies. Other costs such as the annual corporate
party/picnic, outside auditor, legal support, salary of Pres/CEO are
pretty fixed and do not vary in relationship to the number or
complexity of projects. This is a useful distinction for managing
costs but in the final analysis your goal is to make a profit and that
means at the end of the year to have taken in more revenue than your
total costs regardless of how they were incurred....So the easiest way
to approach this is to estimate your total costs in all key categories
and the total number of billable hours you expect to sell that year
(that is, excluding time spent marketing, writing proposals, attending
training/professional conferences, doing performance reviews,
mentoring staff, etc.). Divide total cost by total hours and you have
your average fully loaded cost per billable hour...Add whatever
percentage fee you want to achieve and that is your revenue target per
hour. Divide that by your average direct hourly salary cost and you
have your multiple (a closely guarded secret among consulting firms
for obvious competitive rasons). Because not everyone in the firm
makes the same amount, the multiple can be applied to each employee to
determine their appropriate billable rate to ensure profitability
(assuming you are working on a time & materials basis rather than
fixed cost). [This is the simple approach; because in many firms more
senior people bill less direct than junior people, you need to adjust
the math to account for this since an average multiple applied to a
cheaper junior person will not produce as revenue per hour as would be
the case for a senior (more expensive person). The value of the
distinction between overhead and G&A is that if you are growing
rapidly, overhead will change based on the amount of work that you do
(more faxes, more software, lights burning into the night, etc.)
whereas G&A tends to stay fairly fixed. In most cases, growth adds to
profitability since indirect costs generally do not grow as fast
incremental revenues [exception is hiring lots of new people and
suffering learning curve productivity lags). |
