You may see this listed as labor burn or labor fee burn.
Fee Burn is calculated and stored on time slips. On a time slip, the simple formula looks like this.
(Direct Labor + Overhead) ÷ (1 - Target Profit Percentage)
For Contracts, it is the sum of the calculated Fee Burn from time slips plus unbilled direct expenses. Because this is a reflection of your Net Fee, it does not include consultants, as their fees have already been subtracted from the Gross Fee to get to the Net Fee.
Example: Let's assume a Net Fee of $10,000, Direct Labor of $2,800, an Overhead Factor of 1.65, and a Target Profit Percentage of 18%.
Overhead = Direct Labor x Overhead Factor: $2,800 * 1.65 = $4,620
Burn = (Direct Labor + Overhead) ÷ (1 - Target Profit Percentage): ($2,800 + $4,620) ÷ (1 - 0.18) = $9,048
This project or phase should be wrapping up because 90% of the fee has been burned through, and we have not yet accounted for expenses such as printing or travel.
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Why do we divide by 1 - 0.18 rather than multiply by 1.18? The answer is this: we are using a Target Profit Percentage rather than a Markup. Check out the following.
In the above example, 9,048 - (2,800 + 4,620) = 1628 in profit. 1628 ÷ 9048 is 0.1799, so the operating profit is 18% of the total. If we had applied a 18% markup, we would have ended up with only 1,336 in profit on 8,755 in income, for an operating profit of 1,336 ÷ 8,755 = 15%.
Many people miss the point that the operating profit percentage is operating profit divided by net revenue. The net revenue number includes both your costs and your earnings.