Staff Charge-Out Rate Calculator
How to Calculate Staff Charge-Out Rates
Determining the correct charge-out rate for your employees is critical for maintaining a profitable service-based business. If you set rates too low, you fail to cover overheads; too high, and you may price yourself out of the market.
The standard formula for calculating a charge-out rate involves three primary components:
- Labor Cost: The base salary paid to the employee.
- Overheads: The "burdened" costs of employment, including office rent, utilities, insurance, software licenses, and payroll taxes.
- Profit Margin: The percentage of profit the business intends to make on top of all expenses.
The Charge-Out Formula
The mathematical approach used by professional service firms (like accounting or engineering practices) is as follows:
Total Annual Cost = (Base Salary + Annual Overheads)
Required Annual Revenue = Total Annual Cost / (1 – Desired Profit Margin %)
Hourly Charge-Out Rate = Required Annual Revenue / Annual Billable Hours
Understanding Billable Hours
It is a mistake to divide costs by total working hours (e.g., 2,080 hours for a 40-hour week). You must account for "leakage" such as:
- Annual leave and public holidays.
- Sick leave and personal days.
- Internal meetings and administrative tasks.
- Professional development and training.
A realistic billable target for most staff ranges between 1,400 and 1,600 hours per year, depending on the industry and seniority level.
Example Calculation
If an employee earns $80,000, and their share of overheads is $20,000, your total cost is $100,000. If you want a 20% profit margin, you need to generate $125,000 in revenue from that staff member. If they can realistically bill 1,500 hours per year, their hourly rate should be $83.33.