How Much Overhead to Build Into Your Rate

When an agency sets its rate, the most common mistake is pricing off salary. "A specialist costs so much per hour, I'll add a bit on top — and there's the price." The problem is that salary is only part of what a person actually costs you. The rest is indirect costs, which nobody sees in the rate, and they're exactly why an agency works on a far thinner margin than it thinks.

Let's unpack what indirect costs are, how much of them to build into your rate, and why without them even a "profitable" project can end up at zero.

What indirect costs are

Direct costs are what goes straight into a client or project: the salary for the hours worked on it, subcontractors. Indirect costs (overhead) are everything the business needs in order to operate but that doesn't belong to any one project: rent, accounting, management, sales, software, training, team downtime. The client doesn't pay for these directly, but pay for them they must — through your rate.

If overhead isn't built into your rate, it doesn't disappear — it simply eats into your profit.

Why a salary-based rate leads into the red

Say a specialist's hour "by salary" costs 250 грн and you sell it for 500 — looks like a 100% margin. But add rent, management, sales, downtime, and the real cost of an hour turns out to be not 250 but 450. Then your true margin isn't 100% but only around 11%. One project goes wrong and you're already in the red, even though "on paper" the rate looked twice the cost.

That's exactly why you should build the rate off the full cost of an hour, not off salary — this is covered in detail in the article Cost per hour: how to set your rate.

How much to build in: calculating the overhead rate

The simple way is to calculate an overhead coefficient. Take all the business's indirect costs for the month and divide them by all the direct ones (the salaries of your productive team). For example, if direct costs are 300 thousand and indirect are 150 thousand, the coefficient = 0.5 — meaning for every hryvnia of direct cost you need to add 50 kopecks of overhead. That's the share your rate has to cover on top of salary.

Example: a rate with overhead and without

The salary cost of a specialist's hour is 250 грн. The overhead coefficient is 0.5, so overhead per hour is another 125 грн. The full cost of an hour = 375 грн. If you want a 40% margin, the rate = 375 × 1.4 = 525 грн.

Now compare that with the naive approach: 250 + "add 40%" = 350 грн. The difference between 350 and 525 is 175 грн on every hour that you'd be handing the client for free without even noticing. On a 200-hour project that's 35 thousand in lost profit.

The indirect costs people usually forget

The overhead items most often left out are: team downtime (unbilled hours), time spent on internal meetings and training, management and administration, sales and marketing, software and subscriptions, equipment depreciation. Each of these on its own looks like small change, but together they easily add up to 40–60% of direct costs.

How to keep overhead under control

Indirect costs aren't dangerous in themselves — they're dangerous when they creep up unnoticed. So it's worth recalculating them regularly and keeping the overhead coefficient in view: if it's drifting upward, your real margin is falling even when your rates stay the same. This ties directly to the cost of a client (how to calculate it) and to whether projects are slipping into the red (project margin).

In Finmap, direct and indirect costs are visible in one place, so you can keep the overhead coefficient and the real cost of an hour under control without separate spreadsheets. Try it free for 7 days.