How to calculate your employees’ cost rate per hour

 |  In: Agency management

Essentially, agencies sell people’s time. You have a rate card, which is how much you'll charge for each person's time. But do you know how much a job's actually costing your agency?

If you're using expensive resources to deliver junior work or a project starts to overrun, it might be easy for team members to think it’s no big deal... but if they know an employee's true cost, it might help them to think differently.

Commercial awareness leads to better, more informed decision making... which in turn, all points to profitability.

Working out the hourly cost rate for your chargeable employees would appear to be fairly simple at first glance. You pay them x amount in salary, so you just divide that by the amount of hours they work.

Don’t you? Well, no. The amount a project ‘costs’ in terms of business finance is much more complex than simply what you’re paying one person to work on it.

While most agencies pay their staff on a salaried basis, doing the above calculation would give you (and them) an idea of their hourly rate. But the amount that you charge to your clients is likely to be much higher than this. While this might make your employees indignant, it’s not about trying to pay them less than they’re worth while you sit counting all your money. It’s about charging out the true cost of the hourly rate for the agency.

Employees don’t just have a salary. They have pensions, National Insurance payments and maybe other financial benefits. Plus for each person you employ you need to invest in equipment, training, software and hardware. Then you also have your overheads: rent, utilities, maintenance etc.

And... on top of that you also have non-chargeable people in your business, who all contribute to projects, working collectively with the creatives to bring everything together.

So working out a cost rate needs to take of all these things into account.

Your employee cost-per-hour calculator

If your mind is feeling boggled now, here’s how to unboggle it. There are five simple steps to calculating your cost rates:

  1. Total salary cost per employee. This is each employee’s salary, benefits, NI, pension, bonuses, expenses, car allowances – add these together for your total.
  2. Cost of overheads per year. Essentially, this is all your running costs plus the 'total salary costs' of your non-chargeable staff.
  3. Cost of overheads per chargeable employees. Now take your total from step 2 and divide it across all of your chargeable resources using their full-time equivalent*. This tells you how much extra they need to recover, on top of their salary, to cover these costs.
  4. Find your total charge-out cost. Add your salary cost from step 1 to your apportioned overhead cost from step 3, and this is your total recovery cost for each employee per year.
  5. Calculate the cost per hour. Divide this by the number of working days (e.g. minus holidays and bank holidays) for the daily rate, and then find your hourly rate by dividing this number by hours worked (e.g. 7.5 hours).

To calculate the cost rate per hour of an employee, use the above formula. However, for accurate profit analysis, there is an additional step to take. You should divide the total charge-out cost of the employee by their utilisation rate. For example, if the employee charge out is £50,000 but you only utilise 50% of their time on chargeable work, then their chargeable cost rate would be £100,000 per year. This method ensures that you recover your business costs across all your jobs.

Top tip: You should recalculate these figures whenever there is a change in the employee's salary or utilisation rates or if there is a significant change in overheads.

*To do this, calculate a full-time worker’s annual hours, assuming 7.5 hours per day x 5 days per week x 52 weeks = 1,950h. Next, calculate a part-time worker's hours; for example, 7.5 hours x 3 days per week x 52 weeks = 1,170. Then divide part-time hours / full-time hours to get the FTE. In this example, FTE is 0.6. So, if you have 9 x full-time and 1 x part-time, you’d have 9.6 people as opposed to 10.

How to use your employee cost-per-hour rate to track profitability

Synergist can help you use this data to get your estimating on point and helps you to see if everything stayed on track, or if there’s anything you could do in the future to help your project profitability.

You can add employees’ cost rates to each individual (‘resource level costing’) or use a blended cost rate per level (junior, senior, manager) or by team/role (designer, copywriter). You can then use these cost rates to calculate profit on a job at three stages:

  1. When you estimate a new job or job phase, Synergist uses a resource cost per hour x number of hours calculation to represent the potential profit for each estimate line. It can also show you the estimated and actual totals for time, materials and purchases, giving you an overview of net and gross estimated profit.
  2. When you’re running a job, Synergist allows you to track the actual time and the costs incurred to give you a real-time view of estimated vs. actuals, quoted and invoiced values. You can see all jobs at a glance on your ‘Job list’ or get more detail from the individual job/phase dashboards.
  3. When a job is invoiced, and the costs have been ticked off from the job, Synergist calculates the actual profit. You can see this from the individual job/phase dashboards or using one of the many profit-based reports. You can also drill down into jobs to see where you’ve made a profit and where you haven’t.

This employee cost-per-hour calculator is a straightforward way of getting a handle on the true cost of your people's time and gives your teams more commercial awareness of how much jobs actually cost your business.

Interested in learning more about Synergist all-in-one agency management software? Book a demo