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 Team

You are Losing Money – Part I – Components building your cost rates

When it comes to budget control management software, you may question, “Why should my company implement a budgeting and cost control tool when my accounting team can perform the same tasks?”

Well, you may have heard that there is difference between financial accounting and business accounting. So let us look at the difference first and then we will delve into what can go wrong.

Financial accounting

Financial accounting is required by regulation or law and follows a strict set of accounting standards that all accountants must apply to the financial records of the organization. In the U.S., accountants adhere to the rules of the accounting principles (GAAP). The rest of the world uses the International Financial Reporting Standards (IFRS) for financial accounting. With the use of established accounting standards regulators, tax authorities and investors have a straightforward basis for comparison in understanding and benchmarking company financial records.

Business accounting (also called managerial accounting) is focused on the needs of the business rather than aligning with external accounting standards. Business managers usually use it to produce a significant amount of projections and models, and is used to help management in decision-making and performance evaluation. Business accounting is not a must and rarely used in smaller organisations but always present in larger ones.

One of the major tasks in business accounting is understanding your cost structure in order to be able to price your good or services.

Fully loaded cost

So, how much does an hour of work in your company cost? Not an easy question to answer as you have different salaries, benefits etc. By definition fully loaded cost should comprise from variable and fixed costs, distributed fairly across resources.

In order to be able to calculate with your financial model you need to gather following information:

  • Employee salary – be it weekly, monthly or yearly
  • Bonus
  • Release costs
  • Social security
  • Health insurance
  • Office costs – mainly rent, office food
  • Equipment costs – lapop, monitor, adapters, desk, chair
  • HR costs – supervesion, evaluations
  • Recruitment costs – how much time it cost to recruit a person e.g. how many hours or fees to recruitment agencies
  • Incidental costs – company events etc.
  • Vacation days
  • Approximate sick days per year for the company

Once you got all this information we can move to calculating your fully loaded cost rate. This is a topic we address in our second article.

The Team

Sinking in contract negotiations and hourly rates complexity? Here is an easy way to deal with it

Throughout their lifetime professional services companies introduce many ways to bill clients. Businesses apply mostly two types of agreements: Fixed fee and Time & Material. Fixed fee agreement caps the amount billed to an amount agreed in advance with the client. Time & Material is simply billed by the hour, day, month etc. and each employee is assigned a certain rate. Complexity occurs though once client base increases and rates vary by client, project and function of a resource. Today we will cover these cases.

Reality check

Most managers revert to spreadsheets as a database for employee rates. Once the month is over they export all employee times and apply the corresponding rate to each employee in order to invoice clients. It is generally a simple procedure but business practices involve discounts for certain clients, projects and resources. These dimensions contribute to increasing complexity and keeping track of actual rates as well as applying them to each client becomes a real burden.

Less is more

One way to keep complexity under control is to apply a unified pricing approach for all dimensions. This results in fixed rates for all employees and clients but comes with the obvious disadvantage of little price flexibility and discounts are to be applied at later stage.

At Cronforce we have taken a different approach. Instead of heading for extra simplicity we have put together mechanisms to ensure rates are flexible and at the same time manageable.

How does it work?

Default Hourly RatesSimply said Cronforce uses default template for employee rates and then offers you a rule mechanism to override the default ones. The default rate table (Default Hourly Rates) allows you on one page to assign rates to people based on Job role and Seniority (if relevant). It is a strong way to visualise rates evolution for each Job role and Seniority thus enables you to spot mistakes early in the process. The Rate Rules table allows you to override the default rates by applying filters per clients, projects, employees, job roles and then connect them with a different rate value. Rate options include increase or decrease with an amount, increase or decrease with percents, fixed value. In addition, the system distinguishes between cost and billable rates so you can not only track billable amounts for your clients but also internal cost.

Example: Discount 10% all default rates for a client

  • Select All Employees
  • Select All Job roles
  • Select All Seniority
  • Select Client
  • Select All projects
  • Select billable rate as the one being modified
  • Select % decreaseand enter 10%

Hope this helps and keep in mind we are available 24/7 to help you with any requests – feel free to contact us!

About Cronforce

Cronforce blends business critical tools for small and medium sized businesses with powerful analytics. A one of a kind fusion of dashboards as informative as Google Analytics and business modules as powerful as SAP that provides you and your clients with real-time overview of business and project developments. The platform is operating in the cloud which facilitates day-to-day business and enables managers to make data-driven decisions and increase efficiency.

The Team