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PLEASE HELP - Hourly Cost Rates

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6 posts
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Cara Lunney
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I have read everything I can get my hands on and still am unsure about the following 2 issues regarding hourly cost rates:

1)  Do I divide each employee's cost by:

a standard/consisten total available hours OR by their specific expected billable hours ?

Wouldn't the latter potentially skew hourly cost rates for highly compensated employees with a low billability?

2)  Should I include or exclude benefits in employee cost?  I'm unsure of the pro's/con's.

THANKS SO MUCH FOR ANY INPUT!!!

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hal3186
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Hi Cara,

We've developed an on-line tool that helps you answer all these questions. I actually use it for annual budgeting at our agency. Details are here.

https://www.youtube.com/watch?v=jqQDDCCN7IY

I'm a big advocate of agency collaboration, and I'd be willing to share you this tool.

Contact me if you are interested in getting trial access to it.

Hal

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lauriekay
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Hi Cara:

Calculating hourly rates can be confusing but I'm happy you're trying, it's much better than using your gut. Regarding your questions, when calculating rates by employee, you want to use the hours they will potentially bill in that year. It will skew high for higher salaried employees who don't bill much but it's the only way you'll know what to charge to cover their overhead. You may not be able to charge the full rate but it will give you an idea of where to start.

Also, when using the formula, include salary and benefits in the employee cost. For years, we calculated this using only salary but have recently changed our formula to reflect salary and benefits and are in the process of updating our materials. It gives you a better idea of the true cost of an employee beyond just salary.

Let me know if you want to chat further. I'm always available for a call.

Laurie

610-374-9093

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JeffKlingberg
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Cara ... Do you want a blended rate or do you want to establish task-based / employee rates? Each has a different method. Laurie Kay is absolutely right if you are calculating a single blended rate it will skew higher due to including higher salaried employees.

Yes, you must include salary, burden (employment taxes, health insurance, etc.) and overhead expenses. Burden rates are typically 40%. The next area people get hung up on is the billable hours. You can't have 2000 billable hours for each employee. Typically, the number most businesses use is 1100 - 1200 hours.

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JeffKlingberg
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Hal ... Interesting software. What's the cost after the 30 day trial?

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hal3186
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Jeff...Thank you for your message. Please call me at 701-795-6802. Hal

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