Imagine the firm’s Overhead Rate as a burden placed on its back as it goes about the business of doing its work.
How much is the firm built to carry?
The man who taught me the most about design firm management was absolutely relentless about reducing our Overhead Rate.
He would not rest if it wasn’t in the vicinity of 1.0. If it increased to 1.20, he would become incensed and storm around the office, berating people about their non-billable time and overhead expenses.
Anything approaching 1.50 was nothing but mismanagement to him.
Remaining Upright
In his defense, his point of view was forged by years of difficult economic times, during which it was difficult at best to negotiate reasonable project fees.
Survival meant keeping the firm competitive on a fee basis, which was in turn dependent on lightening our overhead load. Low overhead equated to competitive, which meant we might survive.
Today, I have a much more sophisticated point of view about what a firm’s Overhead Rate ought to be:
It depends.
To talk meaningfully about our Overhead Rate, we must look at our Net Fee Multiplier. If our Multiplier is high enough, then perhaps a low Overhead Rate isn’t as critical to our business model.
Firms with a Multiplier of 3.0 or less must keep their OH as close to 1.0 as possible. There is no room for fat here.
Built for Light or Heavy Loads?
If the firm competes primarily on the basis of fees, its Overhead Rate is key to remaining competitive and to realizing a profit. It should be less than 1.5, preferably much lower. Higher overhead will drive the need for a higher Multiplier, causing the firm to need higher fees.
If the firm wins work by being a specialist or market sector leader, and winning work is less about fees than it is about expertise and market dominance, then the firm’s overhead must support a more robust investment in that sector leadership. This might include R+D, continuing education and training in the project type, and significant visibility in the sector– all those many things that keep the firm out in front.
A sector leader might see an Overhead Rate as high as 2.0, or even higher. This can work as long as its Net Fee Multiplier supports it. But 2.0 is still a very high number.
Think about it. It means the firm is spending twice as much on overhead as it is on salary dollars devoted to project work.
A Balancing Act
An Overhead Rate beyond 2.0 deserves attention, and a deliberate decision to take on such a burden of overhead expense. This high overhead could be weighing you down, profit-wise.
Similarly, a rate lower than 1.0 might indicate anemic investment in staff growth and development, as well as tools and processes. You might be lean, but you might also be mean.
Take a look at the load you’re asking the firm to carry.