The total wages/salaries of employees working directly on client projects.
Please enter valid numeric values. Direct Labor Cost must be greater than zero.
Total Indirect Costs (Overhead):$0.00
Allocation Base (Direct Labor):$0.00
Overhead Rate:0.00%
Overhead Allocation per $1 Labor:$0.00
Note: For every $1.00 you spend on direct labor, you spend an additional $0.00 on overhead.
function calculateServiceOverhead() {
// Get values from inputs, default to 0 if empty
var rentVal = document.getElementById("rentUtil").value;
var adminVal = document.getElementById("adminSalaries").value;
var softwareVal = document.getElementById("softwareMkt").value;
var otherVal = document.getElementById("otherIndirect").value;
var directLaborVal = document.getElementById("directLabor").value;
// Parse floats
var rent = rentVal === "" ? 0 : parseFloat(rentVal);
var admin = adminVal === "" ? 0 : parseFloat(adminVal);
var software = softwareVal === "" ? 0 : parseFloat(softwareVal);
var other = otherVal === "" ? 0 : parseFloat(otherVal);
var directLabor = directLaborVal === "" ? 0 : parseFloat(directLaborVal);
// Validation
var errorDiv = document.getElementById("errorDisplay");
var resultDiv = document.getElementById("resultOutput");
if (isNaN(rent) || isNaN(admin) || isNaN(software) || isNaN(other) || isNaN(directLabor)) {
errorDiv.style.display = "block";
resultDiv.style.display = "none";
return;
}
if (directLabor <= 0) {
errorDiv.innerText = "Total Direct Labor Cost must be greater than zero to calculate a rate.";
errorDiv.style.display = "block";
resultDiv.style.display = "none";
return;
}
// Logic
errorDiv.style.display = "none";
var totalOverhead = rent + admin + software + other;
var overheadRate = (totalOverhead / directLabor) * 100;
var allocationPerDollar = totalOverhead / directLabor;
// Display Results
document.getElementById("displayTotalOverhead").innerText = "$" + totalOverhead.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("displayDirectLabor").innerText = "$" + directLabor.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("displayRate").innerText = overheadRate.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}) + "%";
var allocationFormatted = "$" + allocationPerDollar.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("displayAllocation").innerText = allocationFormatted;
document.getElementById("displayAllocationText").innerText = allocationFormatted;
resultDiv.style.display = "block";
}
How to Calculate Overhead Rate for a Service Company
For service-based businesses—such as consulting firms, marketing agencies, law firms, and IT service providers—understanding your overhead rate is critical for accurate pricing and profitability analysis. Unlike manufacturing companies that might allocate overhead based on machine hours, service companies typically allocate overhead based on Direct Labor Cost.
This calculator helps you determine the percentage of your revenue that must cover indirect expenses before you can count any profit.
The Formula
The standard formula for calculating the overhead rate in a service environment is:
Overhead Rate = (Total Indirect Costs / Total Direct Labor Costs) × 100
Where:
Total Indirect Costs (Overhead): All expenses required to run the business that cannot be directly tied to a specific client project (e.g., rent, utilities, insurance, administrative salaries, marketing).
Total Direct Labor Costs: The wages, salaries, and benefits of employees who perform billable work directly for clients.
Why is this Important?
If you bill a client simply based on your employee's hourly wage, you will lose money. You must markup that wage to cover overhead and then add a profit margin.
For example, if you pay a consultant $50/hour and your overhead rate is 50%, the actual cost to your business for that hour of work is $75 ($50 labor + $25 overhead). To make a profit, your billing rate must exceed $75.
Step-by-Step Example
Scenario: Digital Marketing Agency
Imagine a small agency with the following annual financials:
This means for every $1.00 spent on paying a creative employee, the agency spends $0.50 on overhead support.
How to Categorize Costs
One of the biggest mistakes service owners make is miscategorizing costs. Here is a quick guide:
Direct Labor (The Denominator): Only include time spent on billable client work. If a senior consultant spends 50% of their time on client work and 50% on internal management, split their salary accordingly.
Indirect Labor (The Numerator): Receptionists, HR staff, Bookkeepers, and the non-billable portion of management time.
Pass-Through Expenses: Do not include costs you bill directly back to the client (like ad spend or printing) in your overhead calculation, as these are usually reimbursed directly.
Benchmarking Your Rate
While overhead rates vary by industry, a typical service business might see an overhead rate between 30% and 50%. If your rate is above 60% or 70%, it may indicate that your administrative structure is too heavy for the amount of billable work your team is producing.