How Agencies Calculate Internal Hourly Rates
February 20, 2019

How Agencies Calculate Internal Hourly Rates

While I don’t recommend ever sharing your hourly rate out to clients (they are paying you for an outcome, not time and doing so runs the risk of teaching clients to price hunt), it’s important that you have an understanding of what your agency internal hourly rate is in order to build out your Service Document and price properly. Here’s a rundown on how agencies calculate internal hourly rates.

Generally speaking, the way you come about this is to use your team’s salary or fees, add overheads, and then use a profit multiplier.

Here’s how it works: 

Step #1: Find the Effective Rate of Your Implementer’s Hourly Rate

Let’s say you have a staff member on a $50,000 salary. Your staff, over the course of a year, we give you 1,600 hours of time (this is the average taking into account leave and sick days). This means, his effective rate is $31.25/hr.

Step #2: Add Overheads 

Now, of course, you and I both know that just because he’s doing the implementation work, doesn’t mean other team members or overheads are not going into the production of servicing the client.

So, on average every $1 of direct expense will carry with it $1.34 of overhead. This means that the hourly cost is $31.24 + $41.86 = $73.06/hr. But of course, you want to make a profit as well.

Step #3: Add a Profit Multiplier

Here’s where you use the multiplier. We use a multiplier of 3, other agencies use a multiplier of 2. I would recommend you stick with 3 to protect yourself.

This means that your internal hourly rate is $73.06 x 3 = $219

Once you understand your internal hourly rate, you can then break down time requirements of client deliverables and cost projects properly.  Some agencies will choose to add a 10-20% buffer to invoices in the situation of projects running over scope. Some choose to charge for this upfront and refund any amount remaining once project is completed.

Whatever approach you use it’s important to understand your own costs – without this it will become difficult to built teams and run a profitable business.

If you’d like to swipe our service document, you can do so here: https://academy.cathowell.com/sd

 

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