The firm’s Net Fee Multiplier, also referred to as the Net Labor Multiplier, is an indication of how well the firm is managing its project profitability, as well as its fee pricing.
The higher the firm’s multiplier, the more fees (revenues) the firm is generating from its Direct Labor investment.
What Does It Mean?
The Net Fee Multiplier (NFM) refers to the Net Fee or Net Revenue number we achieve by “multiplying” our Direct (Project) Labor costs. In other words, for every dollar we spend on salaries devoted to project work, how many fee dollars are we earning?
Or, from the flip side, how many fee dollars must we earn for every dollar of Direct Labor, if we wish to make a certain level of profit?
The Simple Math
An NFM of 3.0 means that we’ve multiplied the cost of our labor by three. This is often referred to as a “3-times multiplier,” which assumes that the following is true:
$1.00 Direct Labor + $1.00 OH + $1.00 Profit = $3.00 NFM
In the world represented by this golden equation, these 3 creatures live happily together and share the multiplier evenly. Few firms are fortunate enough to live in this wonderful place. Most of us struggle to keep our Overhead Rate down to, and our Profit number up to, their respective 1/3 shares of this equation.
The Big Idea
What it means is this– if any of the three components of this equation are more than the others, the multiplier must rise to accommodate it.
If not, something’s got to give. If it’s the Overhead Rate that is taking more than its share, it is stealing it directly from our Profit number.
The firm’s options are laid out clearly in the equation above.
Either increase the fees the firm earns for its work, or reduce the firm’s Labor and Overhead costs.
Failing either option, profit will suffer.