Overhead Rate Calculator

How the Overhead Rate Calculator works

Overhead rate calculator: spreading overhead over billable time

Overhead is everything the business spends that is not the direct cost of doing client work. It has to be recovered from somewhere, and the only thing you sell is billable hours — so every one of them carries a share.

The denominator is billable hours, not hours worked. This is where the calculation usually goes wrong. Four people at forty hours for forty-six weeks is 7,360 hours worked; at 65% utilisation it is 4,784 hours you can invoice. Dividing overhead by the larger number understates the overhead per hour by a third, which is enough to turn an apparently profitable rate card into a loss-making one. The non-billable third does not disappear — its cost is carried by the billable two-thirds.

What belongs in overhead. Rent, utilities, software subscriptions, insurance, accounting and legal, marketing, equipment, training, and the salaries of anyone who does not bill — admin, management, finance, sales. What does not belong is the salary of billable staff for the hours they bill; that is direct cost and is counted separately, otherwise you double-count it. The salary of a billable person for their non-billable hours is a genuine grey area and is most cleanly handled by leaving their whole salary in direct cost and letting utilisation carry the effect, which is what this calculator does.

Direct plus overhead gives the floor. Direct labour at $45 an hour plus $25 of overhead means an hour of delivery costs $70 before any profit. Any rate below that loses money on every hour worked, regardless of how busy the team is or how good the client is. Businesses that quote from market rates without ever computing this number can be fully booked and unprofitable at the same time, and the symptom — high revenue, no cash — is usually blamed on collections rather than pricing.

The multiplier is the shorthand. Total cost divided by direct cost gives the multiplier the industry usually quotes: a $45 direct cost against $70 total cost is 1.56×, and adding a target margin on top produces the familiar 2.5× to 3× rate multipliers used in agencies and consultancies. Those benchmarks are not arbitrary; they are this arithmetic with typical overhead and typical utilisation baked in. Yours will differ, and the difference is worth knowing.

Utilisation is the lever with the most leverage. Overhead per hour falls as billable hours rise, without spending anything. Moving from 60% to 70% utilisation across four people adds roughly 736 billable hours and cuts the overhead each hour has to carry by about 14%. Cutting overhead does the same thing directly but is usually harder, and cutting the wrong overhead — sales, training, tooling — reduces the billable hours available next year.

Overhead rate table by annual overhead

Four staff at 40 hours a week, 46 weeks a year, 65% billable and a direct cost of $45 an hour.

Overhead and total cost per billable hour for a four-person team

Overhead rate formula and worked examples

The formula: overhead per billable hour = annual overhead ÷ (people × working hours × billable share). Add the direct hourly cost of the person to get the full cost of a billable hour, which is also the break-even rate.

First example. £180,000 of overhead, 6 people billing, 1,650 working hours each and 70% billable. Billable hours are 6 × 1,650 × 0.7 = 6,930, so every hour carries 180,000 ÷ 6,930 = £25.97 of overhead.

Second example. if a person's salary and on-costs come to £45 per billable hour, one hour costs £70.97 to deliver, so anything charged below about £71 loses money before profit.

How many billable hours does the overhead need? Divide the overhead by the margin each hour leaves after direct cost — at £30 of headroom an hour, £180,000 needs 6,000 billable hours.

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