This article highlights three simple steps to help you calculate an hourly charge-out rate for your business.
It’s especially important that contractors and small service providers (such as electricians, plumbers, mobile computer technicians, etc) know how to calculate an hourly charge-out rate.
Determining An Hourly Charge-out Rate For Service Providers
Many contractors and service providers struggle to determine appropriates rate for their services. Why is this you might ask? It has nothing to do with their management or accounting skills.
Calculating rates for service providers is typically more difficult than setting prices for products.
In the following sections, we’ll separate the formula into three simple steps.
Step 1: How Much Are You Worth?
First, you need to know how much you’re worth. How much would you be paid if you were an employee doing the same job? Review online job and employment search sites to gauge the latest salary ranges.
What are your competitor’s paying? Look at their websites to see how much they charge for their service.
Be cheeky and call them anonymously and enquire what they charge.
But this is only your first step. You need to compare apples with apples. You may not be able to copy your competitors’ rates, as we’re just about to highlight.
Step 2: How Many Hours Do You Want To Work?
In step two, you’ll need to determine how many hours you want to work each year. We generally call these chargeable or billable hours.
Let’s assume you’d like five weeks annual leave and will allow one week in case you’re ill. That means that you hope to work for forty-six weeks in one year.
But what about public holidays? Let’s assume you’re entitled to ten days, you now have only forty-four weeks to earn your income.
To turn the forty-four weeks into hours, determine how many hours you’ll want to devote every day. I know sometimes it feels like you’re working twenty-fours per day!
Chargeable and non-chargeable time
If we consider a mobile computer technician, they’ll spend or lose time on potential non-chargeable hours.
Driving to and from clients; attending to incoming calls; doing the banking and administration all consumes time. It’s not unusual to spend twenty to thirty percent of available time on these activities.
For our example, we’ll assume the mobile computer technician is happy to work eight hours per day, Monday to Friday.
Now, we’ll further assume they “lose” ten hours per week on non-chargeable activities. They now only have thirty hours chargeable time per week.
As they plan to work for forty four weeks per year, they will now have only 1,320 chargeable hours (44 weeks multiplied by 30 hours per week).
Their research indicated that they could earn $90,000 per year if they were employed. They have decided that they’d be happy to earn this amount working for themselves.
You may think their hourly charge-out rate should be $68.20 ($90,000 divided by 1,320 hours). The next step will illustrate why this isn’t quite correct.
Step 3: Calculate Your Expenses
This step is a little harder than steps one and two. It requires you to determine how much you think your expenses would be during the year.
You’re likely to have fixed expenses such as rent, and insurance to pay for the entire year, whether you’re working or not.
Variable expenses, such as vehicle expenses, telephone calls, tax, stationery etc, will vary and may reduce when you’re on annual leave, etc.
Include your expenses when you calculate an hourly charge-out rate.
