Hey, it’s Collin. Welcome to Engineering Echelons, a newsletter full of ideas and insights to help engineers excel at management.

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Often, when engineers begin to dip their toes into operations or project management, they're exposed to various financial terms. One of these is a multiplier. More specifically, a net multiplier.

A net multiplier is simply net operating revenue divided by the cost of direct labor.

Put more simply…

Net Multiplier = Amount Billed / Cost Charged

The net multiplier is one of the critical metrics to know and track. In professional services firms, staff labor is by far the highest cost to the business. Net multipliers show how effectively labor generates revenue.

Net multipliers can also be compared to the breakeven costs of the business. To do this, first calculate the overhead rate:

Overhead Rate = Total Overhead Costs / Total Direct Labor Cost

Comparing overhead rates to companies surveyed by ACEC, Zweig, PSMJ, and other industry organizations/consultants, a typical range is 1.5-2.0.

Then add 1.0 to the overhead rate to get the breakeven multiplier.*

A net multiplier that’s higher than the breakeven multiplier indicates the business is profitable. They are billing more than it costs them to operate.

A net multiplier that’s lower than the breakeven multiplier indicates the business is unprofitable and needs to find a way to improve their business, namely by increasing revenue (fees) or decreasing unproductive costs (administrative staff, office space, insurance, etc.).

*Curious why you add 1.0 to the overhead rate to get the breakeven multiplier? I’ll show why with an example.

Company AE has an overhead rate of 1.75. The average staff blended salary for direct labor is $124,800. This equates to $60/hr ($124,800 divided by 2,080 standard work hours per year).

The direct labor cost is $60/hr.

The indirect cost is ($60/hr)*1.75 = $105/hr

The total cost (direct + indirect) = $60/hr + $105/hr = $165/hr

Or…

The total cost (direct (1.0 + 1.75 overhead rate)) = $60/hr (1.0 + 1.75) = $60/hr * 2.75 = $165/hr

Robert Greene (author) on seeing things as they actually are:

“What limits individuals as well as nations is the inability to confront reality, to see things for what they are. As we grow older, we become more rooted in the past. Habit takes over. Something that has worked for us before becomes a doctrine, a shell to protect us from reality. Repetition replaces creativity.”

—

Todd Graves (founder of Raising Cane’s) on doing things right:

“If you do things for the right reasons in business, money will come.”

—

Jonathan Ross (founder of Groq) on effective recruiting:

“The biggest flip in my hiring was when I went from looking for positives, which is what you do when you’re trying to grow talent, to looking for negatives, which is what you do when you’re trying to select talent.”

Interesting article about how a teacher-turned-executive approaches staff development and retention. Her mindset is heavily influenced by how teachers at her school would track student involvement and engagement levels to better understand where they needed to focus.

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Looking forward to hearing from you. See you next time.

Collin