Billable time: how much is your time worth?

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Deciding how much to charge for our time is always a tricky thing: if we charge too much per hour, we will lose clients. If we charge too little per hour, we won’t make enough to cover our costs.

Too often, we choose how much to charge for our services based on industry standards, previous jobs, or competition. While those are worthy benchmarks to gage our pricing against, they may not be the best factors to use while building our rate sheet.

Here are a few questions worth answering before choosing a rate:

  1. How much revenue do you need? Work up your costs, such as office rent, administration expenses, wages, etc. Then, add your target profit before taxes. This should give you a good idea of the amount that must be billed in a year. Knowing your costs will also allow-you to compute your break-even rate – the rate at which you’re not losing money.
  2. How many billable hours can you and your team work for? It’s naive to assume that 100% of work time is billable. Previous years can give a good idea of how many billable hours can be expected by a person and by the organization as a whole.

Revenues

Once you know your revenue needs and your productivity, divide one by the other and we get our billable hourly rate. For example, let’s say we have the following costs:

  • A team of 10 employees costing us 500 000$ per year in wages;
  • Office rent, equipment and administrative expenses costing us 60 000$ per year;
  • We aim for a 15% before-tax profit, which amounts to 98 823 $.

Our revenues should be of at least 560 000$ per year (to break even) and of 658 823$ to make our target profit.

Now, let’s look at our productivity:

  • Out of our team of 10, we have 7 consultants who can produce billable time;
  • We estimate that our consultants should bill around 70% of their hours, which equals 28 hours per week per consultant;
  • We estimate that each consultant will work around 48 weeks per year, keeping 4 weeks for vacation, holidays and other absences.

Our total productivity is

7 consultants

x 48 weeks

x 28 billable hours per week

= 9408 billable hours per year.

How much should we charge per billable hour?

To attain our profit goal, we need:

658 823$ / 9408 hours = 70.03 $ per hour

To break even, we need:

560 000$ / 9408 hours = 59.52 $ per hour

Can this work?

  • Once we’ve made those calculations, the question remains: is this realistic?
  • Are those rates in line with your peers in the industry?
  • Is your product more or less expensive than your competitors’?
  • What happens if your team’s billable hours ratio is 60%?
  • What happens if your expenses go up? If one of your consultants leave the company mid-project?

Today’s economy has taught us the importance of hoping for the best while planning for the worst.

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