The net multiplier measures the revenue required for each dollar of direct labor spent on projects. A net multiplier of 3.00 means the firm needs $3.00 of net revenue for each $1.00 of direct labor spent on project to cover project labor, overhead and profit. The net multiplier is determined by the profit plan for the coming year. The 'effective net multiplier' is the actual net multiplier achieved. The net multiplier assumes that all project related costs other than labor are reimbursable dollar for dollar including consultants, project travel, printing, reproductions, etc. The net multiplier is composed of:
Net Multiplier Components:
- plus 1.00 direct labor multiplier
- plus 1.50 overhead multiplier
- equals 2.50 break-even multiplier
- plus .50 profit multiplier
- totals 3.00 net multiplier
For time and materials projects, the net multiplier is a billing tool that converts direct labor dollars to billable dollars. The net multiplier is in essence the project budget for time and materials projects. For fixed fee contracts, use the net multiplier to determine the maximum amount of direct labor that can be spent on a project without eating into the firm's planned profit. Calculate the maximum number of direct labor hours by dividing the direct labor dollars by the average direct labor rate.
Example:
| Total fixed fee | $300,000 |
| Less outside consultants | - 100,000 |
| Less other direct expense | - 20,000 |
| Net fee | $180,000 |
| Net fee divided by net multiplier | 3.0 |
| Maximum amount of direct labor | $ 60,000 |
| Average direct labor rate | $ 20.00 |
| Maximum direct labor hours | 3,000 |