Calculating effective and minimum bill rates

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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 include billable hours, non-billable hours, and overhead hours. They do not include PTO hours.

Example: Suppose the standard working hours of an employee are 40 per week and the target utilization is 30 hours per week. If the employee logs 30 hours/week as billable, then utilization rate is 100%. It ignores the total standard working hours and considers only billable target. 

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

Effective Bill Rate = Amount Billed / Total A-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 Annual Expenses / Total Annual 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) / .714 = $126 per hour What this means is that if an employee has a pay rate of $30 and bill rate of $100 with 71.4% utilization, you should charge the client at least $126 to make a 20% profit.

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