The Break-Even Multiplier
Your firm has net fee revenue of $1,800,000. Direct labor is $720,000; indirect labor is $360,000; non-labor overhead is $270,000. The principals want 12% profit on revenue and use an 80% utilization target. A developer asks for a fixed fee on a 6,000 sf office renovation. Your estimator projects 1,100 direct labor hours at an average direct labor cost of $85 per hour, including fringe. The developer offers $160,000, 5% retainage, and payment 60 days after invoice. Your line of credit costs 9% APR. The firm has roughly 15% unused staff capacity for the next quarter. One principal says, “Any fee above direct labor is better than nothing.”
1. Compute the firm’s break-even multiplier, the fee multiplier required for a 12% profit on revenue, and the break-even fee for this project. Evaluate the $160,000 offer.
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Overhead is $360,000 indirect labor + $270,000 non-labor = $630,000. The overhead rate is $630,000 ÷ $720,000 = 87.5%, so the break-even multiplier is 1.875. To earn 12% profit on revenue, fee must equal cost ÷ (1 − 0.12): 1.875 ÷ 0.88 = 2.131. Project direct labor is 1,100 hours × $85 = $93,500. Break-even fee is $93,500 × 1.875 = $175,312.50. Target fee is $93,500 × 2.131 = about $199,250. The $160,000 offer is $15,312.50 below break-even on a fully loaded basis. It contributes $66,500 toward overhead, but assigned overhead is $81,812.50. The principal’s statement is wrong if the hours displace other work or if overhead is not truly fixed. If the staff would otherwise be idle, the job helps cover fixed overhead, but it still does not produce the planned profit and may set a damaging price precedent.
2. Quantify the financing cost of retainage and 60-day payment, and explain how it changes the decision.
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Retainage is 5% × $160,000 = $8,000. If held for about six months, carry cost is roughly $8,000 × 9% × 0.5 = $360. For the 60-day payment delay, a rough whole-fee calculation is $160,000 × 9% × 60/365 = $2,367; a more realistic average outstanding receivable of $80,000 for 60 days costs about $1,183. Combined carry cost is roughly $1,500 to $2,400. That is not large in absolute terms, but on a job already $15,300 below break-even it deepens the shortfall and should be priced or negotiated away. More important, 60-day payment plus retainage increases the firm’s working-capital exposure if the client pays slowly or disputes an invoice. The decision should compare the full risk-adjusted fee, not the gross $160,000.
3. What non-financial and strategic factors should the principals weigh, and what counteroffer would you make?
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Weigh the client relationship, portfolio value, scope certainty, and downside risk. A fixed fee on an existing-building renovation is dangerous if existing conditions are unknown; the firm could absorb costly field verification. The 15% unused capacity argues for taking work that at least covers direct labor and contributes to overhead, but only if it will not disrupt better work and only with a clear scope. A counteroffer around $185,000 to $199,000, with 30-day payment and no retainage, is defensible. Alternatively, offer a lower fee with a narrower scope, or time-and-materials with a not-to-exceed cap and additional-services rates for unforeseen conditions. If the client will not move, accepting $160,000 makes sense only as a deliberate capacity-filling decision with a written scope and a documented expectation of no profit-not as a routine project.