CHARGE OUT RATE CALCULATION

SO YOU OWN YOUR OWN BUSINESS?

ARE YOU WORKING TO LIVE ..,OR LIVING TO WORK?

THE CORRECT CHARGE OUT RATE WILL DETERMINE WHICH PATH YOU TAKE!

LIES, BLOODY LIES AND STATISTICS

•92% OF BUSINESS EXISTS IN 2008-09 WAS IN THE SMALL BUSINESS SECTOR WITH 0-4 EMPLOYEES. THIS WAS BEFORE THE GFC!!!

•2007-2009 A NSW BUSINESS EMPLOYING 0-19 PEOPLE HAD A 73% SURVIVAL RATE.

•ARE YOU THE ONE IN FOUR THAT WON’T SURVIVE?

Data from Department of Innovation, Industry, Science and Technology.

IMPORTANCE OF CALCULATING CHARGE OUT RATES CORRECTLY

• To make certain that you are working and making a profit.

• To understand your cost structure

• To make the bidding process more successful

• To manage jobs and projects efficiently and profitably

•To enable you to make informed decisions related to your business

CONSIDERATIONS IN CALCULATING CHARGE OUT RATES

1Rate to cover your Wage. This is the rate you calculate to recover your wages. If you make $20,000 Net Profit in your business and have not taken a wage, you should consider working at McDonalds which is probably a better pay for a lot less worry.

First step is to determine how much you need.The wage you want will depend on YOUR circumstances and YOU need to work this out taking into consideration all YOUR needs such as mortgage payments, living costs, school fees etc.

Second step is finding how many chargeable hours you can work.To work out chargeable hours you need to be reasonable as you cannot work 24 hours in a day. Typically you will have 2080 hours in a year (40hrsx52weeks). What you need to give consideration for are:

Holidays 3 weeks.Statutory Holidays 2 weeksSick 1 week

So 52 weeks now becomes 46 weeks or 40hrsx46 weeks=1840 hours for charging clients.

CONSIDERATIONS IN CALCULATING CHARGE OUT RATES

1840 hours seems reasonable but have you considered the Non chargeable activities such as:

Administration Travel time Tendering Tea and other breaks

These all add up and unless you have a detailed diary a rule of thumb is that they can be around 25% of your time (1840* 0.25= 460hrs) which gives you 1380 chargeable hours for the year (1840hrs- 460hrs =1380hrs).

So if you want a $80,000 salary you need to charge $57.97 per Hour to recover your salary ($80,000/ 1380= 57.97)…but wait there is more… this is the base rate what about taxes, super, work comp? To be safe you would add another 20% minimum to the $57.97 to give you a $69.56 rate ($57.97X 1.20= $69.56).

CONSIDERATIONS IN CALCULATING CHARGE OUT RATES

2Rate to cover your overheads.

This is the rate you calculate to recover your fixed costs of running the business. Even if you don’t charge a single hour you still need to pay power, rates rent vehicle costs etc.

Begin by analysing your past costs if you have a history. If you don’t look at what you will need to run a business. Total up all these costs and say they come to $30,000.

Remember the hours you calculated? We apply these hours to the costs to come up with $21.73 per Hour ($30,000/1,380hrs = $21.73).

CONSIDERATIONS IN CALCULATING CHARGE OUT RATES

3Profit margin.

What this calculation provides is the return you want from the business. So for every hour of chargeable time we build a % profit margin. This margin is up to you but should be

reasonable. In our Example we will put a 10% margin on the labour and overhead rates to get $6.52 for a profit rate (($69.56+$21.73) * 0.10)= $9.12.

What do all the rates look like in total?

Labour Rate $ 69.56 Overhead Rate $ 21.73 Profit Margin $ 9.12 Total Charge out rate $100.41

You should always compare your charge out rate to the industry averages. You need to know if the rate is competitive. The recommended service rate for a Licensed Trade person is $106. Don’t forget to charge for after hours work at the appropriate rates.

I HAVE A RATE NOW WHAT?

You need to know if the rate is competitive. Just because you have a charge out rate does not mean that it will be profitable and win business.

What does it mean if my rate is lower than the average?A lower than average rate offers opportunity to win businessBecause you are lower does not mean it is better to stay low. Charging too little is as bad as charging too much as it may undermine consumer confidence in you business. Is he a cowboy? Will the job be cheap and nasty orAre you a smarter and a better electrician?Ask- are the costs low because I have not taken in something? Or is it because I run a very tight ship, smarter and control my costs?

What does it mean if my rate is too high?Am I being too unrealistic in my rates?Have I got control of by business costs?Am I comparing my price with a low baller and should I match him?Does my work command a premium due to reputation?Can I justify value add i.e. loyalty discount?

OTHER ITEMS OF COST TO CONSIDER IN THE PRICE

Variable Costs

These costs will move in relation to a variable. An example is your vehicle running costs related to taking business outside your area i.e. rural. Here you may want to charge a extra rate for milage which can be based on ATO rates.

Material Costs

Material costs are not included in the calculation of a charge out rate. Typically these costs are added separately at cost plus mark up. Again there are several ways to do this. You can use retail price, wholesale price or the actual cost price to you to put the mark up on.

Important Note

The calculation above represents a sole trader. If you employ staff the calculation is more complex and is based on their work and takes into account Awards, RDO, Redundancy etc. Make your life simpler and purchase your labour rate manual from NECA.

SUMMARY

Be realistic in your expectations when working out the rate.

Wages you want to draw..$80,000 or $200,000 Chargeable hours you can work..24/7?

Understand the costs in your business well.

What are the fixed costs i.e. rent, utilities, tools Material costs and quality Variable costs i.e. vehicle costs, overtime if you have

employees.

Review, Analyse and Act.

Change is inevitable and your business is no exception. You must constantly analyse your cost structure You must know what your competitors are charging You must be aware of what the market is willing to pay You must review the charge out rates based on all of the above