How does BQE Core use the Overhead Multiplier? There are companies calculating OHM every quarter while others may change it yearly. Different companies have different procedures and policies and hence different ways of handling time entry and billing.
Generally, companies calculate OHM and Bill Rate as:
Overhead Multiplier = (Total Expense + Allowance for Bad Debt) / (Direct Project Labor + Direct Project Expense)
Bill Rate = Direct Personnel Expense x (Overhead Multiplier + Profit)
Some government agencies will not allow any allowance for bad debt or marketing and limit profit. Direct Project Labor can be either salary expense or Direct Personnel Expense, depending on your practice or your contracts.
Some companies do these calculations from the General Ledger and set up special accounts for Direct Labor and Indirect Labor. They use a simple formula to calculate Overhead Rate:
OHM = Total Indirect Expenses / Total Direct Labor.
For BQE Core & QuickBooks Users:
When using QuickBooks Online as an accounting software and integrating with Core, you have to ensure sending the cost (time) to the right accounts in QuickBooks. That means your activity items must be mapped to distinguish direct from indirect time. You must also separate project-related expenses from indirect (overhead) expenses. Proper mapping is the key here.
In this case, for overhead activities, Activity Items can be considerably different than those for billable projects. You will most likely need a separate set of Activity Items that distinguish between ‘Indirect’ and ‘Direct’ time. So, in creating a new entry for a pro bono project, you would need to choose ‘Overhead’ as the contract type, and then assign activity items that have been set up to map to the Indirect Labor account in QuickBook’s Chart of Accounts. Expenses are more complex, because the same type of expense may be either Direct or Indirect requiring different coding to comply with tax laws and other requirements.
Some firms may have people who don’t necessarily enter their time in BQE Core. They have categories of activity that are outside projects (Admin, Marketing, etc) and are accumulated as Indirect Labor. They can also designate projects as ‘Marketing’ and ‘Overhead’ and all labor, regardless of the activity items, goes to the G/L Indirect Labor account. You can still get project reports to see who did what.
The point here is that the mapping between Core and QuickBooks is dependent upon the Activity (task) Codes that are included in the project. Once this is set up correctly, your staff will simply enter an activity that matches the task most closely related to their work, with no regard to accounting or mapping whatsoever. For those whose projects are small, controlling the activity items on a project by project basis may seem like a lot of work.
In some cases, companies deal with billable/non-billable, and also chargeable (direct) vs. non-chargeable (indirect or overhead) time and expense. In other words, regardless of time or expense being non-billable, it is still chargeable to a project since it is a cost of doing the project. It might not be billed to the client, but it still costs money and needs to be identified.
In Core, there is an option to designate a project with the ‘Overhead’ Contract Type. This is used for some internal work such as marketing activities or an office renovation. We treat this like a regular project. You can even have small projects and still use the same set of activity items. You can delete or exclude those that do not apply. Using activity codes allow you to break down the project and phase into smaller tasks. This can be quite useful when you are putting together a budget for a project and tracking budget vs. actual cost as a project progresses.
It is recommended to have everyone in your firm who draws a paycheck (including principals) to enter time in Core so that you have an accurate accounting of the hours (and thus, dollars) invested in keeping the doors open. It may be a bit odd for non-project personnel to do so since Core is ‘project-centric’, however, there is much to be said for consistency and the use of a single application to record time. These ‘indirect’ people can basically make the same entry (say Project=GEN:Off, Activity Items=clerical) from one day to the next and the system will send the time to the appropriate G/L account. This will then allow you to easily calculate the OH Multiplier. Linking this information to QuickBooks allows you to process payroll and automatically track PTO (paid time off).
In Core, calculate the company’s overhead multiplier as:
- Run Profit & Loss Report for the last 12 months and under Expenses locate the total expense and total payroll expense (salaries).
- Then use this formula: Overhead Multiplier = Total Expenses / Total Payroll Expense
Total Expense = $1,000,000
Total Payroll = $400,000
OHM = 1,000,000/400,000 = 2.5
What this means is that for every dollar you pay in wages, you end up spending an additional $1.50.
Core multiplies the Pay Rate of the employee by the Overhead Multiplier to derive the default Cost Rate. A Cost Rate is applied to actual hours worked to compute the Cost Amount for the time entry when it is saved. When you update the OHM, the new cost rate (Pay Rate x new OHM) will be applied to all the new time entries for that employee. When you create a new budget (that includes optional costs) after updating OHM, it also uses the updated cost rate.
If you’re looking to simplify calculations like these, look to a project accounting solution like BQE Core. Core uses artificial intelligence and automation to save you from doing the math, and it offers comprehensive accounting features so you can bypass Quickbooks entirely.