How to set a rate that makes lending your resources worthwhile
Charge-out rates are a common feature of the businesses across any industry that provide services.
This can range from cleaning agencies and accounting firms to manufacturing companies and landscape gardeners.
A charge-out rate is the rate clients pay to a business for use of that business’s resources.
Most often, that will be an employee’s time and expertise, but it could also be the use of a piece of specialised equipment that has a direct hourly cost associated with it.
For simplicity, we’ll talk about charge-out rates in the context of employees, but the following advice applies for machinery too; you’d just substitute the tool’s operating costs in for the employee’s salary or hourly rate.
Charge-out rates will be more than the business pays its employees directly, since a charge-out rate factors in other costs the business may have. These will include productivity levels, tools and equipment.
Of course, a good charge-out rate will also account for some profit!
When to use a charge-out rate
You’ll likely want to use charge-out rates whenever a client is paying for the use of resources owned by your business.
Let’s say you run a security firm and have a client that needs to hire some of your employees to work a festival with somewhat flexible demands.
You’ll use a charge-out rate to bill the client based on the hours worked by your employees.
The festival client won’t pay your employees directly in this case. They’ll pay you, and you’ll pay your employees according to their salary or the hourly rate specified in their contracts.
Everything on top of those figures goes towards your other costs, which might include scheduling employees, transporting them to the festival, their equipment, meals, and so on.
It can also factor in the cost of any employees you have that don’t generate income, like reception or call centre staff.
These employees are still important to the function of your business, but you typically won’t be paid by clients for their time, so charge-out rates for projects need to take these costs into account.
In addition, you want to make sure the charge-out rate covers all these and more, so that your business makes a profit by taking on the festival job.
That’s why charge-out rates are significantly higher than the hourly rates employees are actually paid. For instance, the charge-out rates of newly qualified lawyers at top law firms can reach £600 an hour.
Even if you don’t charge by the hour for projects, having an idea of your charge-out rate can be useful.
It will help you evaluate the profitability of projects.
If you know a certain task will take an employee 5 hours to complete, but it pays less than 5 times that employee’s hourly charge-out rate, then it might not be worth taking on.
How to calculate a charge-out rate
As you can see above, there are lots of things to factor into a charge-out rate, and it’s no wonder that business owners sometimes struggle to know where to start when it comes to setting a reasonable rate.
After all, set your rate too high and you might price yourself out of potential jobs. Set it too low and you won’t cover all your costs and risk the long-term profitability of your business.
The most accurate way to calculate a charge-out rate is to factor in all the associated costs.
But that can be difficult to do if you’re having to include one employee’s worth of your business’s costs.
Still, if you have a steady business and know how often you charge out employees, as well as all your annual costs, you can ensure that each employee’s rate contributes to meeting costs and making profit.
There are also handy calculators available online that will run you through many of the common factors to consider and help you to set a reasonable charge-out rate.
You should then of course compare that to the competition in your industry to ensure you’re remaining competitive.
A quick rule of thumb used by many is to charge employees out at 3 times their salary. One third of that obviously covers their salary, another third for costs, and the final third as profit.
But your own calculations might produce very different results!
How to set alternate pay rates for employees
If you regularly send employees out as resources for a range of client projects, you may find that those employees will need different hourly rates depending on the work.
For instance, working Sundays, public holidays, evenings, or overtime typically involves a higher rate of pay, and your charge-out rates will likely reflect this.
Tracking different rates of pay can be difficult if you’re manually scheduling your staff. In Findmyshift, you can set alternate pay rates for any special circumstances.
Findmyshift’s reporting and payroll features make it easy to set alternate pay rates with a code and forecast your upcoming costs.
This makes it easy to see what employees are being paid for particular jobs, and you can use these figures to calculate appropriate charge-out rates.
Stay on top of what you’re billing clients using charge-out rates and you’ll be well on your way to a profitable business model.