Hourly rates are the basis for any project pricing. Here it’s important to distinguish between the internal hourly rate, which tells you how much an employee costs per hour internally, and the external hourly rate. The external hourly rate is the price the customer will have to pay per hour for the service in question. These two questions are key here: 1. How much does it cost my company to do this work? and 2. What profit do we want to make from this work?
Pricing projects properly: how much does an employee really cost?
If you want to price projects, there is no getting around having to work out hourly rate figures. We will show you how to roughly work out the internal hourly rate.
The internal hourly rate is a very handy key figure
In this article, we will be focusing on the first question, and on working out the “internal hourly rate”. So in effect what we want to find out is how much our employees cost per hour, and we will be using a practical calculation method to do this:
How to work out these full costs
Full costs comprise salary costs, incidental wage costs and other ancillary costs incurred for each employee. More specifically, these are:
- Gross annual salary including 13th monthly salary payment and estimated bonus etc.
- Incidental wage costs: statutory employer contributions for social security including old-age and surviving dependants insurance, disability insurance, fund for loss of earned income, unemployment insurance, accident insurance and family allowances
- Average costs for vocational/professional training
- Recruiting costs
- Optional value-added services provided by the company to employees
- Other ancillary costs incurred for each employee: administration, workspace costs, operating expenses, office equipment, coffee/tea, cold drinks and so on.
How to work out effective working hours
Effective working hours tell you how many billable hours are actually worked by employees. It’s based on the following calculation:
Tips on the internal hourly rate
- It is well worth recalculating the internal hourly rate on a regular basis. Even though it won’t provide an exact figure, it does provide a solid indication of the value of the work, which can shed light on how profitable a project is.
- Try to be conservative with calculations: you can stay on the safe side by doing a conservative calculation of ancillary costs and hourly rates.