Ever struggled with having enough information on a rate to negotiate with – no time or money for a single rate analysis benchmark? Maybe you need a quick analysis to make sure a new supplier is aligned with your other preferred suppliers. What about needing to know the profit margin for each position on a rate card? Maybe you want to improve your Algebra/Excel skills – continuous learning plan anyone? Whatever the driver is, information is power. I’m going to show you in five minutes how you to figure out the breakdown of an hourly rate. It’s only three steps and you’ll look as smart as a Nuclear Physicist!
Salary + OH + Profit = Hourly Rate (Billed)
It’s really just a simple equation. Unfortunately getting the exact numbers isn’t as easy. There’s also always more than one way to get there (just ask and I’ll give you about five more!). But by using this quick methodology, you should be able to come within 10-15% of the actual rate break out.
Step One – Hourly Rate (Billed)
This is the easiest of all steps and the least amount of work. All you need to do is have the hourly rate you are being charged. This is normally a pretty simple an easy to get as it’s typically as part of the proposal/scope of work they give you for a project. If not, just ask and you have the first part of your equation. For the remainder of the article, let’s use an example of a Project Manager in the San Francisco / Bay Area. Assume the billing rate they are charging is $140/hr. – for a proposed project.
Step Two – Salary
Salary is the critical part of this equation. Get it wrong and your entire analysis falls apart. So how do you figure out someone’s approximate salary and make sure you get it right? Well here are some options:
Option 2 – LinkedIn and Indeed both have salaries tools too (you may need to share your information first) but, if you don’t see specifically what you are looking for you can always just search for an open position as a job posting for salary information (when you have LinkedIn Premium).
Option 3 – Search the company’s own internal job postings. Typically they include compensation, years of service and requirements.
Option 4 – Search old invoices, purchase orders or contracts of suppliers with similar services.
Option 5 – Get a second or third quote from a similar supplier.
So now let’s assume you are able to find a couple of different salaries for a single position, but they are not an exact match. That’s okay, you just need to be close to an average for this to work. And the more data points you have from different sources, the stronger your analysis becomes to support you. Once you have a few data points, take the average of them and turn that into an hourly rate (by dividing by 2,088 hours).
Average of three Salaries: 105,667k then divide by 2,088 = $50.61/hr.
Step Three – Overhead (OH) and Profit
What is overhead? Any cost not directly associated with the direct costs in making a product. For example: advertising, rent, ultilitis, taxes, office supplies, travel, insurance, accounting, legal expenses, etc.`
Now comes the fun part! Now if you don’t have this insight to standard rates, you will need to a make an assumption to have a starting point. So what should you assume? Assume Salary and Overhead are the same. The rest becomes Profit. So OH is also $51/hr. and therefore profit is $38/hr. or 27%. See below for the excel explanation of the calculations.
Yes, I know what you are going to say. That when you Ass-u-me things everything can go sideways. Of course it can, but remember this is only a starting point. You’ll just have to play and adjust the numbers to make things reasonable if the profit percent looks too high/low. Since there are only two parts, it’s easy to do. All you’ll need to do is build an excel model – below (or ask me to help build you one).
This model gives you a range of scenarios based on OH%. There are all types of different analysis and equations you could add to make this tailored for your exact use. Although, sometimes keeping things simple works best. Either way, all information you would need to input/change is Billing Rate and Salaries (colored in red). And you can be guaranteed that given such a wide range, it includes the exact numbers somewhere in between.
Lastly, if you have a budget and the time, you could pay to have this analysis done for you (via Beroe, SmartCube, Gartner, etc.). The added benefits include exact numbers, benchmark rates of competitors and even against similar companies to assess if you’re being overcharged. If don’t have a budget, well – that’s where this analysis/excel model pays off. It will help you get enough information to set you up for success (no matter what you are using it for!)