You are Losing Money – Part II – Calculating cost rates and billable rates

When it comes to budget control management software, you want answers to the following questions:

  • What is my fully loaded cost per resource?
  • What should be my billable rate?
  • How much do I make per project?
  • How do I ensure I do not run over budget?

We have already provided the components forming your fully loaded cost (FLC). Now find here few tips how to connect all these parameters and calculate your FLC.

  • You want to ultimately come to the cost per hour or day for your resources. To achieve this you need to get the cost per month divided by workdays.
  • Workdays vary by country and industry so get the right number. If you do not know it there are plenty of such calendars in the internet so ask Google.
  • Extract vacations and sick days and you will come to the actual workdays of your employees. Then divide this number by 12 to get the actual workdays per month.
  • Normally salaries vary based on seniority. If possible organize your resources in tiers based on seniority in order to have few lines of FLC for your resources. Otherwise could become a very long list of people, and believe me, this will be a nightmare to make any sense of.
  • Get the average amount per month considering total pay for the year including bonus.
  • Take into account social and health insurance per resource.
  • Consider any release costs and add it to the estimated amount per month.
  • Do not forget to estimate recruitment costs for your employees, especially if you use external provider that charges you a flat fee. Alternatively count the time that your employees spend to interview candidates until you select one e.g. one out five candidates make it and it takes you two hours each, then consider 10 hours of cost (if non-billable) or billable rate for this person.
  • Same for HR and admin services – consider the time spent on payroll, evaluations etc.
  • Take your rent and divide it by the people. If your employee number changes, just calculate your cost per sq.m and consider that on average you need to have around 5 sq.m. per person.
  • Extract training costs per resource. Normally this is budgeted per unit so should be easy to plug into your formula.
  • Account for equipment and furniture – laptops, monitors, adapters, desks, chairs.

Once you have extracted all costs and know the actual workdays, a simple division will give you the cost per day, and a further division by working hours e.g. 8 h a day, the FLC hourly rate.

Now, how to calculate the billable rate?

Well, obviously you cannot bill less than FLC but there are actually more costs to consider like management salaries, marketing, cost of sales etc. This is then cost plus pricing. But this is a truly complex topic and it should be defined based on your company strategy, target industry, product etc. In any case, it is generally not a good idea to price under your cost. 🙂

Stay tuned – in our next article next week we will address the last set of questions and namely:

  • How much do I make per project?
  • How do I ensure I do not run over budget?

The Cronforce.com Team

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