Basic hourly rate question...

[DavidWH]

We've a spreadsheet containing all our overheads, including both our salaries, that is used to work out a cost per hour, or day to keep the place open.

Say we've calculated our hourly cost at £40 an hour, including both our salaries.

Is it best to split that £40 between us both, ie £20 p/h each. So charging customer £30-40ph)
or
Use the £40p/h, charging customer £50-60p/h, but that 1 person covers both salaries, great as I'm often doing the admin that can't be billed to a customer.

There's a big difference between the two on a job, where fitting could be either £240, or £160... £80.00 on a £250-300 job is a fair chunk. In addition we're making profit on the materials used, so it's not just labour.

Suppose we take on additional staff, overheads remain the same, with the exception of their wage, how would this affect the calculation?

What's the thoughts on this?

 

[justintime]

For me, it would be the cost of supplying the labour, plus a markup. Putting in a labour charge that covers all your expenses would, I guess, price you out of the market.

As an example, I employ a lady to do data entry. My bookkeeping charge remains the same and I bear the expense of employing her

 

[DavidWH]

But we need to pay for the unit, electric, broadband, heating, phones, vehicles, software in order to deliver the service and it all needs to be paid for and incorporated into the cost.

Seperate to that there's materials required to produce a job for a customer, with their markup.

It's not a labour only service most of the time.

 

[Newchodge]

You need a pricing structure that covers all your costs and allows a reasonable profit, while remaining competitive.

Is it best to split that £40 between us both, ie £20 p/h each. So charging customer £30-40ph)
or
Use the £40p/h, charging customer £50-60p/h, but that 1 person covers both salaries, great as I'm often doing the admin that can't be billed to a customer.

Frankly I haven't the faintest idea what you mean by this.

 

[DavidWH]

All overheads including two salaries gives an hourly cost of £40 per hour.

Should we charge each persons hourly rate our based on the £40

Or base each persons hourly rate based on £20.

The difference being, one person covers both wages, against each person covers their own wage.

 

[Scalloway]

Fixing a price based on the recovery of overheads is only part of the answer.

What is the market rate? If it is higher than the rate you calculate then use that.

 

[DavidWH]

There is no market rate, prices vary wildly locally.

By lowering our hourly rate we could increase the amount of hours we bill, thus making more money.

 

[Scalloway]

I would suggest doing some sums to see what the potential income versus potential costs are using different rates. Remember it is easier to drop prices than to raise them.

 

[DavidWH]

As we are now we get some jobs and make good money.

We can still do that for the right customer. But we could also do more work, make less margin, but overall make more money each month.

Sure we could target better clients who'll pay more, but surely it's easier to convert the leads we're already getting at no additional cost.

 

[MBE2017]

Personally I prefer to work less for more, targeting better paying clients. That’s just myself.

In answer to your question, you need to charge an hourly rate which covers all your fixed costs, plus Labour and profit. Bookwork costs you in time and money, someone has to pay for it. I would charge a full rate per job, you can always discount if required.

 

[Mr D]

As we are now we get some jobs and make good money.

We can still do that for the right customer. But we could also do more work, make less margin, but overall make more money each month.

Sure we could target better clients who'll pay more, but surely it's easier to convert the leads we're already getting at no additional cost.

Don't work for the sake of working.
Charge appropriately to cover your costs, give some profit and cover quiet times.

Dropping price can get some more work - until such time as someone else drops their rate.
Its harder to keep custom when you put prices up. And overall you may well have to increase prices over time as your costs increase.

 

[Bob Morgan]

If successful, your company will grow, and there will be more employees. YOUR time will become Less Productive (being less ‘Hands-On’), and will have to be recovered via the ‘Overhead.’ QED you will need to have a variety of Gross Hourly Rates (Gross meaning that they will need to include the ‘Profit Element’) for each Member of Staff, against work that has NOT been paid for.

Very Simply, ‘Coal Face Staff’ within the organisation will quite possibly be 80% to 90% Productive. Whereas Principals and Directors are as low as 30% or have to be considered as 0% These costs still have to be recovered in the form of an ‘Indirect Overhead.’ (‘Direct Overheads’ will include, Rent, Business Rates, Electricity, Gas and Water, etc.)

When bidding for work your rates will need to be ‘Real!’ – Not just using a Salary Multiplier, otherwise your bids and tenders will be uncompetitive. Therefore, EACH Employee will have a different Net Rate Per Hour (‘Net’ meaning that it ‘Excludes Profit!’) When preparing a Bid or Tender you can Programme WHO will work on that Job/Project, using Historic Information from Timesheets, Annual Leave and Incapacity Leave, etc., together with their general ‘Production Level.’

Then comes the question of ‘Profit!’ This can then be adjusted for individual Clients, Customers and Commissions, etc. Good ‘Repetitive’ Clients will yield a relatively Low Profit. On the other hand, New and Untested Clients will be levied at a higher rate, due to ‘Risk!’ Therefore, Hourly Rates will differ from Person to Person and Project to Project.

The ‘Secret’ to this, is ‘Apportioning’ the Overhead Cost, in order that it is distributed Evenly and Equitably. You will also have times when ‘Non-Productive Staff’ will become Fee Earning, and vice-versa.

I have a ‘Tried and Tested Spreadsheet’ which calculates this for each employee, and is Booked-Back to every Project. It is not difficult to achieve, and gives a competitive edge. Let me know via a PM if you would like this.