When discussing retainers there are some key parts to the calculation:
Business expenses: all expenses found on the Profit and Loss Statement.
Overhead expenses: all costs found on the income statement except for direct labor, direct materials, and costs attributable to outside subcontractors that can be billed directly to a customer’s account. Overhead expenses are absorbed by the business and factored into the selling price as a percentage of the direct labor cost.
Direct labor: labor used to produce products and services purchased by customers. These head-hours are directly attributable to customer activity.
Indirect labor: labor used to provide supporting services to the business such as accounting, clerical, custodial, customer services, management, purchasing, sales, and warehousing. These man-hours support business functions but are not directly chargeable to the customer.
Direct materials: materials used in the final product or service purchased by customers. These materials are charged directly to the customer’s account.
Overhead percentage: ratio between direct labor and overhead expenses. This percentage is used to allocate overhead expenses proportionately to direct labor dollars billed customers.
Typically for marketing service providers, including media, creative, digital etc, we see the following sometimes unique overhead costs contribute to the overhead margin:
– Office rents, utilities and services (e.g., security) and related taxes
– Depreciation and amortisation – Building leasehold, furniture, and equipment
– Telephone and fax charges
– Postage and freight – (general business only)
– Other office expenses (subscriptions, presentations, etc.)
– Staff training and welfare (including employee activities and conferences)
Indirect business cost
– Stationery/office supplies
– Media measurement services and other non client specific research (excluding staff time)
– Legal and professional fees
– Bank charges
Taxes and government charges
– Payroll tax, property tax, etc
– Superannuation (if not included in direct salary costs)
Regional and world-wide overhead allocations
– Agency advertising
– New business
– Inventory write-offs
IT / infrastructure
– Repairs, maintenance, and renewals
– Computer expenses (hardware, software, support, and leases. etc.)
– Equipment leases (copy machines, faxes, etc.)
– Maintenance and service agreements
Non billable personnel costs
– Indirect salaries, support, administration staff
– Recruiting fees
– Severance payments
– Local travel costs
– Indirect travel
Any other costs of doing business not included in the direct costs can also be includes, but these would be exceptional and require classification and substantiation.