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Calculating Time-based Fees and Charge Out Rates

By Stuart Ayling

When it comes to setting the price for your services there are some important factors to consider. One of the main strategic decisions is
to decide whether you will charge based on hourly/daily rates
(time-based), or charge based on results achieved (value-based).

Download Fee Calculator Spreadsheet (Excel 24KB)

There are arguments for both time-based and value-based approaches. However as time-based billing is most common, we will discuss the main aspects of that fee-setting approach in this article.

Hourly rates can often be deceptive. To clients they can appear too high, as they do not understand the dynamics of the service-provider business.

And to providers hourly rates can often appear attractive, when upon closer examination they are not enough to generate sufficient bottom line profits.

Actual numbers can vary from $35 per hour for typing and personal assistant duties, to $65 per hour for graphic design, to $150 per hour for business management advisors, to $300 per hour for experienced lawyers.

Three Main Approaches

There are three main approaches to setting time-based fees, and each one can be expressed either as daily, hourly, or fixed rates.

Based on minimum requirements.
How much do you need to charge to cover your minimum expenses (or overheads)?

Based on competitors.
Know how much your competitors are charging – and charge lower or higher – based on your objectives.

Based on exclusivity/expertise.
Charge a higher rate (maybe the highest rate) because you offer something that is truly unavailable elsewhere, or that can deliver fantastic results for your clients.

Market-Oriented Factors

However, you always need to take into account additional market-oriented factors that will impact on your ability to charge the fees that you would like.

1. How do clients perceive your type of service?

You need to take a hard look at your own industry and find out what clients perceive as the real value you have to offer. Do they see your work as being generic, with one provider easily substitutable for another?

Or do clients see your work as requiring some education, some experience, and some degree of judgment, which is difficult to compare to others, and that can significantly help them achieve their objectives?

Clearly, the higher the perceived status of your category of services, the more the client will expect to pay.

Marketing tip: No matter what industry you are in, to claim higher fees you must position your services as being more specific and more exclusive, and therefore less likely for direct comparison to competitors.

2. How much time do you have available to undertake billable work?

For most services providers, whether it be professional services (like accountants), personal services (like hairdressers), or other services (such as dog washing) it is impossible to charge clients for every hour of every day you spend ‘at work’.

There are always a variety of demands that reduce the time available for billable work. These other demands include: administration and office work; travel time; maintenance or servicing equipment; professional/self education; marketing; and sales activities like initial meetings and networking events.

When we take into account:

  • Public holidays (10 days p.a.)

  • Personal holidays (20 days p.a.)

  • Allowance for sick leave (10 days p.a.)

  • Weekends (102 days p.a.)

... we can find that the original 365 days in the year quickly gets whittled down to around 223 days.

Estimates of how much working time is actually spent on ' billable hours' varies from 30% to 60% for independent service providers. This allows for non-billable time that is spent on travel, marketing, administration/accounts, and education.

This can vary depending upon your situation. For example, a relatively junior staff member working within a professional services firm may have a billable hours target of around 85%-90%. This is possible as they are not required to undertake non-billable tasks such as marketing, client liaison, and new product development. Those activities are usually reserved for senior staff. 

Example Calculations

Assuming you have 223 days available, at an average 50% billable time ratio, that leaves around 111 days per year to actually undertake work that you can charge clients for.

From this, you can do a quick calculation to determine your rough annual revenue if you were able to achieve a 50% charge out ratio. That is 111 days x 8 hours (per day) x your hourly rate.

Example (calculate annual revenue):
Number of billable days available per year = 111
Number of hours worked per day = 8
Proposed hourly rate = $85
Equals annual revenue of $75,480

To estimate how much your hourly rate should be, based on your desired income level, simply adjust the equation, as follows.

Example (calculate hourly rate):
Target of $120,000 income before expenses and tax.
Number of billable days available per year = 111
Number of hours worked per day = 8
Equals 888 billable hours per year.
Equals a charge out rate of $135.14 per hour.

Important Note: This calculation shows top line revenue, before any business expenses or taxation has been deducted. To calculate the hourly rate including expenses, add the total expense value to the income target.

Of course these calculations assume you actually do work and charge for the entire 888 hours during the year. If you do not maintain the hours per day, or the days per year, total revenue will be reduced.

The market factors mentioned above will also have some impact on whether you can actually charge out at the rate you calculated, or whether you can charge more or less.

There is rarely a simple one-size-fits-all answer to effectively calculating your hourly rates. You may decide its too difficult to calculate, and just take a guess. Maybe you can simply charge what others are charging. But that may not be the best way to achieve the maximum return for the work provided.

No matter which charge out rate you choose, your marketing challenge is to make sure you generate enough client demand so you can achieve a suitable volume of work.


  

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