About bill rates

Determining bill rates

When you set your bill rates, consider the following:

• Cost of work: This includes staff salaries and benefits, as well as overhead costs of non-billable people, rent, and other operational expenses.
• Utilization goals: The percentage of work hours that are considered direct labor (project work that clients pay for) as opposed to indirect labor (work that’s considered overhead, or work in-between clients’ projects)
  • Utilization differs per organization, but it’s typically in the range of 50% – 75%. Higher than 75% may be unhealthy for an organization over a long period of time.
• Profitability goals: The profit margin that the organization is aiming for. This differs across organizations, but is typically in the 15%-25% range.
• Fully burdened rate: The true cost per production hour for each team member, you can calculate exactly how much you need to charge per hour for that person to meet your gross profit goals on the projects. 
• Pricing multiplier: You can multiply the hourly rate by the pricing multiplier. A typical pricing multiplier is between three and five. Multipliers vary greatly and depend on your industry. Research what multiplier makes the most sense for your team.

Labor expenses and overhead expenses change over time. Recalculate this rate once or twice a year to make sure it’s current and adjust the bill rates for new projects as needed.

Calculate estimated project costs

When presenting your clients with a price for your work, base your estimate and calculations on this external bill rate. Figure out how much time it would take to complete the work and multiply that by the hourly rate. 

It may be better to communicate this to the client as a fixed bid and not to divulge the hourly rate calculations that went into it. Otherwise, it can lead to situations where you’re negotiating around every hour, rather than the value of the work performed. Even when project durations are unpredictable, as in software development work, for example, you can still calculate in blocks of time, and with an upper budget limit.

Set up your project budget in Resource Management

Fixed-bid projects

For a fixed-bid project, you bid to complete a defined set of work for a certain amount of money. Your budget is the price you charge the client.

Retainers

For a retainer, the client pays a fee for a set amount of work, but the scope isn’t typically defined upfront. There may be a not-to-exceed agreement for the budget. With retainers, the budget is dependent on how you want to break up the retainer.

For example, it could be a series of one-month projects or phases or a year-long project. 

Time and materials

For time and materials projects, you get paid for actual hours worked. You can leave the budget blank and simply keep track of incurred fees. You can also enter a target amount or the maximum agreed-upon amount. For time and material projects, you might need to adjust bill rates to reflect the agreed-upon markup for worked hours.