Hacker News Reader

Comment by dwohnitmok | Hacker News Reader

That overhead honestly doesn't seem that high to me. If I think about private companies with low need for physical equipment (e.g. software companies) I suspect the overhead would be comparable if not greater. Usually I hear ~100% as an average figure (keeping in mind that overhead is defined as a percentage of non-overhead costs so 100% means half of your money spent is on overhead).

But I'm not that confident. Would love to hear from business owners.

View on HN

I’m at a small software company that does lots of smallish (500k-1.5M) contracts like this. The government does audits to determine our overhead rate. Our is 2.8. That is my billing rate to the government is 2.8 times my hourly rate as determined by my salary. That pays for rent, benefits, and for things like the employees who aren’t on direct labor (e.g. accounting, HR, etc)

That means your overhead rate would be around 65%.

No it does mean the overhead is 280% if defined the same way as the university (overhead is calculated as percentage of non-overhead costs, not overall costs).

But I'm not sure whether the company would count just an employee's salary as non-overhead costs. I'm fuzzy on the details of how overhead is usually calculated.

> No it does mean the overhead is 280% if defined the same way as the university (overhead is calculated as percentage of non-overhead costs, not overall costs).

But he said:

> That is my billing rate to the government is 2.8 times my hourly rate as determined by my salary.

Doesn't that mean that the government pays a total of 2.8x his salary, so overhead would be 180% (+100% salary = 280% total)? Or what mistake did I make here?

Yeah, I don't know exactly what is called "overhead" if it's the full 2.8 or 1.8 above my costs. All I know is the accountants told me to write down 2.8 and that the bill that we send the government is 2.8x what I make "hourly" for the hours work on that contract.

Yeah. So for every hour you bill, about 35 cents of every dollar goes to you and 65 goes to the company.

And this is where it's weird, because 65%, 180%, and 280% are all valid, but different, ways of looking at it.

Because you get 35% of the money, the company gets 65%. i.e. 65% of your billable hours are overhead.

Or, the company gets 180% of what you get. Or, you could say your overhead rate is 180%.

Or, you charge the government 280% of what you get paid. Which is the effective end result.

>That is my billing rate to the government is 2.8 times my hourly rate as determined by my salary.

Why does your salary define the overhead rate for the entire company?

Sorry, that was me being lazy because I was typing on my phone. The government tallies up all qualified expenses the company has (salaries, benefits, rent, utilities, etc). And then tallies up all how many hours employees worked on "direct labor" so things directly related to a client (in lawyer speak, think "billable hours"). And then they come up with a ratio which is your overhead rate and that's the rate you're allowed to charge the government.

    all_expenses / total_hours_worked_by_all_employees = average_rate
    all_expenses / direct_hours_worked_by_all_employees = direct_rate
    direct_rate / average_rate = overhead_rate
    my_hourly_rate * overhead_rate = my_billing_rate

There's more nuance on what are qualified expenses and what are direct hours and things like that, but the government has formulae, and they determine your billing rate - or at least the overhead that turns into the billing rate.

Now, of course, my company can't pay me $1000/hour which turns into $2800/hour invoices to the government because then we'd be too expensive and never win the contract. So there is downward pressure on salaries because of that, and it prevents us from hiring superstars because their hourly rate will be too high. So that's one reason the government doesn't really get the A team working for them.

Reply on news.ycombinator.com