Calculating effective and minimum bill rates

Minimum Bill Rate is the rate producing the target profit per hour. Many owners, principals and managers do not take into account all the key elements that make up a minimum bill rate. To determine the minimum bill rate, you need to know not only the profit margin, but also the utilization rate of your employees and their overhead multiplier.

The calculations involved are:

Utilization % = Billable Hours / Total Hours x 100

where Total Hours can be based on the actual hours logged, standard working hours, or standard working hours (minus deductions), depending on the Utilization Based On field in Settings > Company > Work Time. For details, check the field description in Company.

Example: Suppose the standard working hours of an employee are 40 per week and the utilization is set to be based on the standard working hours. If the employee logs 28 hours/week as billable, then utilization rate is (28 / 40) x 100 = 70%.

Next, you can compute the effective bill rate, which is also the realization rate of an employee.

Effective Bill Rate = Amount Billed / Total Actual Hours Billed

For example, if the amount billed for this employee is $5000 and the total hours
billed for it are 50, then:

Effective Bill Rate = 5000 / 50 = $100 per hour

Now let us calculate the Overhead Multiplier (OHM) as: 

OHM = Cost Rate / Pay Rate or

OHM = Total Expenses / Total Payroll Expenses

Example: If the total expenses incurred in a year are $1,000,000 and the payroll expenses amount to $400,000, then:

OHM = 1,000,000 / 400,000 = 2.5

Finally, you can calculate the minimum bill rate as:

Minimum Bill Rate = (Pay Rate x OHM x Target Profit Multiplier) / Utilization Rate

Example: If the pay rate of an employee is $30 per hour and the target profit percentage is 20%, then: Minimum Bill Rate = (30 x 2.5 x 1.2) / .7 = $128.57 per hour

What this means is that if an employee has a pay rate of $30 and bill rate of $100 with 70% utilization, you should charge the client at least $128.57 to make a 20% profit.

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