Overhead Rate

Overhead rate measures how much of your revenue gets consumed by the costs of running your agency — everything that isn't directly billable to a client. This includes rent or coworking space, admin and operations salaries, accounting and legal fees, software subscriptions (project management, design tools, communication platforms), insurance, marketing your own agency, professional development, and office supplies.

The formula is straightforward: overhead rate = total overhead costs ÷ AGI (or total revenue, but AGI gives you a cleaner number). If your overhead is $500,000 and your AGI is $2 million, your overhead rate is 25%. That means for every dollar of revenue your team generates, 25 cents goes to keeping the lights on before you pay for the people who actually do the work.

Healthy agency overhead rates typically range from 20-35% of AGI. Below 20% might mean you're underinvesting in tools, training, or infrastructure. Above 35% usually signals bloated operations — too much office space, too many non-billable roles, or expensive tools that aren't delivering value. Remote and distributed agencies tend to run lower overhead rates because they've eliminated the single biggest overhead line item: office space.

Your overhead rate sets the floor for your pricing. If overhead is 30% of AGI and direct labor costs are 50%, you need at least 80% of revenue just to break even — leaving only 20% for profit. That's why overhead management is one of the few areas where agencies can improve margins without touching pricing or client relationships.

Overhead rate also helps you evaluate investments. Adding a $2,000/month project management tool raises overhead, but if it saves 100 hours of PM time per month (worth $15,000+ in billable capacity), it's a clear win. Track overhead as a percentage, not just as a dollar amount, so you can see whether it's scaling appropriately with revenue growth.