Overhead

Why it matters

Delivery margin minus overhead is your net profit. Two agencies with the same delivery margin can have very different net margins if one carries bloated overhead. Watching overhead as a percentage of agency gross income keeps it in check.

Rule of thumb

If delivery margin is healthy (say 55%+) but net margin is thin, overhead is usually the leak. Look at tooling, non-billable headcount, and office costs first.

What overhead means in business

Overhead expenses are every cost that keeps the business running without being traceable to a specific client. Rent, software you would pay for with no clients at all, accounting and legal fees, your own marketing, admin salaries, insurance and utilities. The test is not whether a cost is necessary; it is whether you could put it on a client's invoice line and have that be honest.

In an agency the line sits between overhead and delivery cost, which is the labour and expense that goes into client work. A designer's salary is delivery cost. The bookkeeper's salary is overhead. The same person can straddle both, which is why the split has to be decided deliberately rather than by whoever does the books.

What percentage of revenue should overhead be

Honestly: nobody has measured it at scale. Every overhead percentage in circulation traces back to two practitioner sources, and both are stating a target rather than reporting an observation.

The Agency Management Institute publishes 55:25:20, meaning 55% of net revenue on people, 25% on overhead and 20% left as profit before tax and bonuses. Parakeeto puts overhead at 20 to 30% of net revenue for an agency with an office and salaried staff, and 14 to 24% for a distributed agency working with contractors.

Those two frameworks cannot be combined. The AMI 55% covers all loaded salary including admin and leadership, leaving its 25% for non-salary costs only. Parakeeto puts production labour in delivery cost and leaves admin and founder salary inside overhead. Take 55% from one and 25 to 30% from the other and you have counted the same administrative salaries twice, and built a profit and loss that cannot exist.