How do you calculate a billable rate?
A useful billable rate starts with the annual cost of having someone available to deliver client work, not simply their salary.
Add salary, employer costs and any overhead you want the role to recover. Then work out how many hours that person can realistically bill during the year. Dividing annual cost by annual billable hours gives you the break-even cost of a billable hour.
To include a target margin, work backwards from the percentage of revenue that needs to remain after those costs have been covered.
Annual billable hours = working hours × working weeks × billable utilisation
Break-even hourly rate = annual loaded cost ÷ annual billable hours
Target billable rate = break-even hourly rate ÷ (1 − target margin)
This is why taking a £50,000 salary and dividing it by 1,950 working hours usually produces a misleading cost rate. Not every working hour can be sold to a client.
Example: calculating a consultancy billable rate
Scenario: Salary £50,000, employer costs 20%, annual overhead allocation £10,000, 37.5 working hours per week, 46 working weeks, 70% billable utilisation, 35% target margin and a 7.5 hour billable day.
- Annual loaded cost
- £70,000
- Available hours
- 1,725 hours
- Billable hours
- 1,207.5 hours
- Break-even hourly rate
- £57.97
- Target hourly rate
- £89.19
- Target day rate
- £669
- Annual revenue
- £107,692
The important number is not the employee's theoretical hourly salary cost. It is the cost of each hour that can realistically be sold to a client.
What should your agency or consultancy billable rate cover?
The rate you charge a client has to recover more than the person's salary.
Salary and employment costs
Start with salary, employer payroll costs, pension contributions, benefits, insurance and other costs directly associated with employing the person.
Non-billable time
Consultants and agency staff do not spend every working hour delivering billable client work. Internal meetings, training, sales support, administration, holidays, sickness and time between projects all reduce the number of hours available to recover their annual cost.
Business overhead
Software, finance, operations, management, office costs, recruitment and sales still need to be funded by the work the business sells. Allocating a share of overhead to billable roles gives you a more conservative commercial floor.
Margin
Breaking even is not the goal of a commercial professional services firm. The rate also needs to leave enough room for the margin required to absorb risk, fund growth and generate profit.
Billable rate vs cost rate vs charge out rate
The terminology varies between professional services businesses, but the underlying concepts are similar.
Cost rate
The internal cost associated with an hour of someone's time. Depending on the business, this may include salary only, fully loaded employment cost or an allocation of overhead.
Billable rate
The price charged to the client for an hour of work. A sustainable billable rate needs to sit above the cost rate by enough to achieve the required margin.
Charge out rate
Charge out rate is another common term for the amount charged to a client for labour. It is particularly common in the UK and in businesses that maintain rate cards by role.
Scopra uses rate cards to connect project roles and billable rates to the actual cost and financial performance of project delivery.
Why billable utilisation changes the rate you need to charge
Utilisation is one of the most important inputs in professional services pricing because the cost of employing someone continues even when their time is not billable.
If a consultant has 1,725 available working hours during the year but is 70% billable, only around 1,208 hours are available to recover their annual cost.
If utilisation falls to 60%, the same cost has to be recovered from only 1,035 billable hours. Unless the rate changes or utilisation improves, margin falls.
That is why rate cards, capacity planning and utilisation should not be treated as separate decisions.
Margin and markup are not the same thing
A common pricing mistake is adding the desired margin percentage directly to cost.
If a billable hour costs £70 and you add 30%, the resulting £91 rate represents a 23.1% margin, not a 30% margin.
To achieve a 30% margin, divide the £70 cost by 0.70. The required rate is £100.
30% markup on £70
£91
30% margin on £70 cost
£100
Should a consultancy use an hourly rate or a day rate?
The commercial calculation is essentially the same. A day rate is the hourly billable rate multiplied by the number of billable hours represented by a day.
Many consultancies prefer day rates because they make proposals and rate cards easier to read. Other firms use hourly rates where work is more variable or timesheets feed directly into billing.
Whichever format you use, calculate the underlying cost and margin consistently.
How often should you review billable rates?
Rates should be reviewed whenever the assumptions behind them materially change. For many firms that means at least once a year, with additional reviews when salary costs, utilisation, overhead or delivery mix changes significantly.
- Salary reviews
- Changes to employer costs
- New benefits or software costs
- Material changes in utilisation
- Hiring more senior or junior staff
- Changes to overhead
- New target margins
- Major changes to the type of projects being delivered
A rate card that was commercially sensible two years ago may no longer produce the margin you expect today.