Hourly rate calculation

Hourly rate calculation is the derivation of the rate charged for an hour of work from what that hour actually costs. The rate has to cover the direct cost of the person, the share of their time that cannot be sold, the overhead of the business, and the margin.

How is an hourly rate built up?

Start with the annual cost of the person, divide by the hours that can actually be sold rather than the hours they work, add the overhead share, then add the margin. A person costing 78,000 euros a year with 1,200 billable hours has a direct cost of 65 euros an hour before overhead.

Why divide by billable hours rather than working hours?

Because internal work, administration, training and sales still have to be paid for. Dividing by 1,600 working hours instead of 1,200 billable ones gives 48.75 euros, a quarter below the real figure, and produces a business that is busy and unprofitable.

What overhead belongs in the rate?

Everything not attributable to a project: rent, administration, software, management time, sales. Divided across the billable hours the business expects to sell, not across its headcount. In the build-up, the overhead share is added after the annual cost has been divided by billable hours, and before the margin.

How often should rates be recalculated?

At least annually, and whenever the billable share changes materially. A rate built on an assumed utilization the business no longer achieves is wrong in the same direction every time it is used. The rate has to cover the direct cost of the person, the share of their time that cannot be sold, the overhead and the margin.

troi prices work from what comparable projects really took. See project estimation.