Tips

Knowing Your Charge Out Rate: A Key to Profitability

If you employee people and charge them out at an hourly rate then you need to determine that your charge out rate is actually being recovered and adds to your bottom line.  Having awareness of this measure will ensure you are not underpricing your jobs and actually contributing to your overall profitability.  Make sure you're just not working to pay for your employees, you need to take a slice for yourself.

The Importance of Charge Out Rate

The charge out rate is what you bill your clients for the services undertaken by your employees. This is most common for any trade servcie you offer the marketplace and affects all businesses where employees are engaged on a wages basis and their services are offered on an hourly rate.  It usually encompasses material costs (which are priced separately) It should cover not only the salary of the employee but also other associated costs such as benefits, overheads, and desired profit margin.

How to Calculate Charge Out Rate

Here’s a step-by-step guide on how to calculate the charge out rate for an employee:

1. Determine the Total Annual Cost: This includes the employee’s salary and benefits. For example, if an employee earns $80,000 per year and has 10% retirement costs, the total annual cost would be $80,000 + ($80,000 * 10%) = $88,000.

2. Calculate the Total Working Hours in a Year: If an employee is employed for 52 weeks in a year, gets 4 weeks holiday leave and 2 weeks recreational leave, they work for (52 - 4 - 2) weeks * 40 hours/week = 1840 hours.

3. Calculate the Charge Out Rate: Divide the total annual cost by the total working hours. So, $88,000 / 1840 hours = $47.83 per hour.

So, you should charge at least $47.83 per hour for this employee’s services to cover costs and achieve your desired profit margin.

The Impact of Employee Productivity

Employee productivity can drastically affect the profitability of the charge out rate. If an employee is not working efficiently during their billable hours, it can lead to lower profitability or even losses. Therefore, it’s important to monitor and improve employee productivity to ensure that you’re getting the most out of your charge out rate.

In conclusion, understanding how to calculate your charge out rates is essential for running a profitable business. It allows you to price your services accurately, remain competitive in the market, and plan for future growth.