How to Calculate the Overhead Rate for Professional Services

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Professional services include legal services, business management, accounting and other consulting services. When pricing a professional services contract, the U.S. Small Business Administration recommends that you take into account professional time, administrative support, special service costs and overhead expenses. Overhead includes rent, utilities, equipment leasing, supplies, marketing expenses, legal fees and insurance. Divide overhead costs by the maximum billable hours to get the overhead rate.

  • Determine your annual maximum billable hours. The SBA advises that you use half the total available hours because some of your time will be spent on administrative matters, marketing and other non-billable work.

    Assuming a five-day workweek, eight-hour workdays and four weeks of annual vacation, the total available work hours are 1,920 hours (48 weeks x 5 days per week x 8 hours per day) and your maximum billable hours are 960 (1,920 / 2). ConsultantJournal.com recommends adding a safety margin of about 3 percent for uncollected bills. Therefore, the adjusted billable hours are about 930 (960 x 0.97). You can also average the billable hours over the past four or five years to arrive at a baseline for the current year, provided the type of clients and work remain the same.

  • Estimate your annual overhead expense. You can use your average historical overhead expense and adjust it by the rate of inflation. Continuing with the example, if the current inflation rate is 2 percent and your five-year average annual overhead expense is $50,000, your estimated overhead expense for this year is $51,000 ($50,000 x 1.02).

    If historical information is not available, list all your overhead items, such as rent, utilities, maintenance, telephone, Internet connection, business license fees, membership fees, marketing, insurance and basic office supplies. Assign a reasonable expense for all of these items based on current monthly trends and add them up to get the total overhead expense for the current year.

  • Divide the annual overhead expense by the maximum billable hours to calculate your overhead rate. To conclude the example, your overhead rate is about $55 per hour ($51,000 / 930 hours).

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