![]() This means we need to identify two things in order to Calculate Billable Employee Cost Per Hour: In this context, Cost-Per-Hour is expressed by the following formula: What all of that said, what exactly is the formula for calculating employee cost per hour in your agency? Let’s jump in! If we agree that we’re using cost-per-hour to calculate gross margin, it becomes clear that we shouldn’t be factoring in overhead of billable capacity for most employees. Why is this important to establish before we talk about employee cost per hour? Without clarifying the question being answered it’s difficult to justify what gets factored into the employee cost calculation. We’re going to use employee cost per hour to understand what it costs us to earn revenue, and how efficiently. I’m going to discuss how to Calculate Billable Employee Cost Per Hour for the purpose of calculating Gross Margin. If we can’t consistently protect gross margin on projects and earn our revenue in an efficient way, getting healthy net profit will be extremely difficult (or impossible) That’s why I recommend focusing on Gross Margin when assessing client or project level profitability and reserving net margin analysis for broader contexts in your agency.Īnother important reason we want to focus on Gross Margin or Average Billable Rates is that it’s the foundation for the profitability of the entire agency. It’s especially useful because it levels the playing field and allows us to compare virtually any subsection of our business to another both within our agency or against the industry as well. You can think of Gross Margin similarity to EBITDA in this context. It’s also a metric that allows us to benchmark things against each other both internally and externally because it removes variable costs like overhead from the equation. This is because it helps us understand how efficient we are at earning revenue in our agency or service business. The bottom line is that if we’re looking at the project/client level – we generally want to focus on Gross Margin first. But that’s a whole other post on its own. (And why it’s actually more useful to understand gross margin on projects or average billable rates). I could go on a lengthy rant about why I don’t think trying to calculate net-margin on projects and clients is a worthwhile pursuit. This usually happens when someone is trying to work backward from project-costing to net-profitability. I see this most often when questions about overhead and billable capacity come into the fold. In my experience, most of the confusion around what to include and what not to include in employee cost calculation comes down to not being clear on how this cost-per-hour number is going to be used (and what questions it’s going to help answer). Why do so many people calculate employee billable cost-per-hour the wrong way? Calculating Gross Margin on Projects or Clients.Using Employee Cost Per Hour In Your Agency.The Steps to Calculating Employee Cost-Per-Hour in Your Agency.Fully Loaded Employee Calculator – The Method.I want to help you understand how to calculate this important metric in the different contexts you might encounter in your agency. That’s why I’m writing this guide to give you a clear answer on the cost of an employee. So we’re helping you answer how much does an employee really cost your agency. ![]() There’s a lot of mud in the water, and you’ve probably read a lot of conflicting information on the subject. This is our 2023 employee costs calculator. What should and shouldn’t be included in an employee cost calculation? Tip: If you just want to try out the employee cost calculator, it’s right here. What about employees that are part-admin and part-billable? What about benefits and insurance? Production software? You can understand the actual cost is very different than the hourly wage. Should I include overhead in an employee cost calculation? What about worker’s compensation? State unemployment tax, social security, 401k? Should a fully loaded true cost of employee calculation be based on their gross capacity or just their billable capacity? The ultimate question we’re all trying to answer is – how much does an employee cost per hour? Or How much does having an employee cost? ![]()
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