Glossary
Overhead
Overhead refers to the ongoing costs of running a business that cannot be attributed directly to a specific project or client. For agencies, overhead includes office rent, software subscriptions, management and administrative salaries, marketing and new business costs, and utilities. Understanding and managing overhead is essential to accurate pricing, profitability analysis, and financial planning.
Fixed vs variable overhead
Fixed overhead does not change with activity level: rent, minimum staffing, software licences, and insurance are the same whether the agency has one project or fifty. Variable overhead scales somewhat with activity: sales commissions, freelancer coordinator time, and some software costs increase as the business grows.
For most agencies, fixed overhead is the dominant form, which means profitability is highly sensitive to revenue volume. A small drop in utilisation or client loss can have a disproportionate impact on net profit because overhead stays constant.
Overhead recovery rate
Agencies use an overhead recovery rate to understand how much overhead each billable hour needs to cover. If monthly overhead is £50,000 and the team has 1,000 available billable hours, the overhead burden per hour is £50. Any rate below £50/hour effectively delivers work at a loss before margin is considered.
This calculation is one of the key inputs to rate setting. Agencies that have not modelled their overhead per billable hour are often undercharging for their services.
Example
A 12-person agency has monthly overhead of £60,000 (including salaries for non-billable staff, office, software, and management time). The billable team delivers approximately 1,200 hours per month. The overhead per billable hour is £50. When pricing projects, the agency ensures every hour is priced above cost plus overhead to generate a positive contribution margin.