Billing Rate Explained
The billing rate includes all of the factors the company or contractor has to cover to reach their target income. In other words, the billing rate is the pillar of every service-related business that ensures healthy development and prosperity.
In terms of billing rate variety, the most common types are the following:
- Project-based rate
The project-based rate is a rate that is fixed in agreement with the client and all employees that work on that project have the same hourly rate. The project-based rate cannot be altered mid-project, so it’s best for teams to divide the project into monthly checkpoints and report their progress regularly to the client to see if they’re on the right track.
- Team member or person-based rate
The team member-based rate means that different employees have different hourly rates depending on their position in the team. For example, team leaders can earn $50 per hour, while regular team members earn $40 per hour.
- Task-Based Rate
The task-based rate means that the same employee may work on different tasks and earn a different hourly wage depending on the task. For example, copywriting is charged $40 per hour, while editorial tasks are charged $50 per hour.
- Flat billing rates
Flat billing rates are fixed rates and are typically charged to the client when the project ends. The flat rates can be charged per project, monthly retainers, or other types of payments per client/company agreement.
How to Calculate the Billing Rate?
Here are three simple methods to calculate your billing rate more easily and maintain a healthy business.
Calculate Your Costs
- Labor costs.
Instead of calculating your salary or the amount of money you’ll earn as a full-time employee for the hours you work, you should calculate the costs of your services or the labor costs in your market niche.
- Benefits and taxes.
Once you determine the labor costs, you can add the required benefits, such as payroll taxes, insurance, retirement, medical coverage, etc.
The overhead costs are expenses you need to cover in order to run, maintain, and grow your business. Overheads are indirectly related to the services you provide and include electricity bills, office materials, and other costs.
- Tax deductions.
Everyone that generates income is obligated to pay taxes so it’s great to go into the finer tax details and find ways to benefit from them. For example, if you’re a self-employed contractor, you can receive many tax deductibles in order to run your business. These can include but are not limited to home offices, office materials, car leases, other types of professional supplies, etc.
Calculate Your Billable Time
When you’re creating your billable rate, it’s recommended you calculate your utilization number. This number takes into account the number of hours you can bill your clients instead of the number of hours you actually spend working on a daily, weekly, or monthly basis.
Profits and Losses
This final step comes after you understand how to calculate the costs of your billing rate. This is the point where you can calculate your billing rate to turn a profit.
- Calculate your total costs including labor, tax, benefits, and overhead costs.
- Following that, divide the number of the total costs by your estimate of your total billable hours (this number represents the hours you plan to work multiplied by the utilization rate)
- The number you’ll end up with is the billing rate for your business to break even. Going into business always follows the idea of turning a profit, so adjusting your billing rate by raising your hourly charge or increasing your project-based rate as needed.