Home What's New Site Map E-Mail Information Request Form

Deion Associates & Strategies Inc.
QuickLinks
Announcement
The Megan Hayward Fund

Profiles & Affiliations
Legislative Alert
Commentary
Dining / Accommodations Guide


Seminars & Workshops
Articles
Power Point Presentations

Starting A Consulting Business
"Setting The Fee"


I.   CALCULATIONS (PARAMETERS)

    A.   WORKING HOURS (DAYS) AVAILABLE / YEAR

    Example: 52 Weeks X 40 hours = 2080 hours/year
              (No allowance for holidays, vacations, sick time, etc.)


    Example: 2080 Hours           = 260 working days/year
         8 Hours/day

    Example: Adjustment:

    2080 hours
    -   80 hours   (2 weeks vacation)
    -   40 hours   (1 week sick time)
    -   72 hours   (9 holidays)
    1888 working hours available/year

    Example: 1888 working hours available/year         = 236 working days/year
        8 hours/day



    B.   UTILIZATION RATE

    Utilization Rate = Billable Hours            
    Working hours available


    Example: 1132 billable hours *                     = 60%
    1888 working hours available

      * (See calculations for billing hours available on page 2)



    C.   BAD DEBT RATE

    Collection Rate = Total fees collected
    Total fees billed


    Bad Debt Rate = 100 - Collection rate

    Example: $105,000 Fees collected             = 98%
    $107,540 Fees billed

    Bad Debt Rate = 100 - 98% = 2%



    D.   ACTUAL BILLING DAYS (HOURS) AVAILABLE

      Working hours available:
      Adjustment (hol., vac., etc)

      Total working hours available

      Administrative work, development
      approx 20% of work time

      Marketing, education, etc.
      approx 20% of work time

      Other calculations (travel, etc)
      would be placed here
      2080
      -  192

      1888     (236 days)


      - 378 hours     (47.2 days)


      - 378 hours     (47.2 days)



      _____________________________________________
      Total billable hours available

      Total billable days available
      1132 hours

       141.5 days




    E.   LABOR RATE

    Labor Rate = Annual salary
    Billable days available

    $39,550. *         =  $279.51 / day
     141.5 days

    $279.51/day         =   $34.94 / hour
     8 hours/day



      * $35,000 annual salary + 4,550 (approx 13% payroll taxes) = $39,550.

II.   OVERHEAD EXPENSE

    Although there exist many methods to calculate a firm's overhead expense, it is advisable to develop projected budgets for these expenses first, then determine what percentage of your billable hours they will comprise.

    Certain assumptions have been made in the following calculations. Specifically, the salary for consultant labor (and applicable payroll taxes) are not considered part of the overhead expenses, whereas consultant benefits have been included in the overhead expenses. Salaries for support personnel have not been identified or included in any of the categories, but if these expenses are applicable, only the portion which is directly related to services performed for clients (direct labor) should be billed directly to the client in a billable hour fashion. The remaining portion of such support personnel expense should be calculated into the overhead expenses.

    If these expenses are to be re-defined or apportioned differently, it is imperative that the basic calculations which were used to determine hourly billing rates be adjusted accordingly.

    There are some consultants who prefer to create a relationship between overhead expenses and labor rates. In some instances the overhead expense ratio to labor rate is as much as 150%.



SAMPLE PROJECTED OVERHEAD EXPENSES



Rent
Utilities
Telephone
Pager
Cellular telephone
Online computer service (Internet)
Postage
Equipment
Furntiture
Stationery
Printing / supplies
Answering service
Typing / secretarial service
Legal / Accounting
Business Licenses / Permits
Insurance:
Health
Life
Disability
Liability, etc.
Auto
Work. Comp (2%)
Advertising
Dues / Subscriptions
Reference material
Travel
Entertainment
Professional Mtg./Conv./Trade
Education
Auto (TBA)
Equipment Lease
Supplies
Maint./Cleaning
Misc.

TOTAL:
MONTHLY

500.00
150.00
300.00
11.33
40.00
30.00
96.00
150.00
150.00
50.00
50.00
100.00
100.00
160.00
25.00
400.00
100.00
85.00
50.00
120.00
66.00
200.00
60.00
50.00
100.00
200.00
200.00
100.00
120.00
125.00
50.00
75.00
100.00

4113.33
ANNUAL

6,000.00
1,800.00
3,600.00
136.00
480.00
360.00
1,152.00
1,800.00
1,800.00
600.00
600.00
1,200.00
1,200.00
1,920.00
300.00
4,800.00
1,200.00
1,020.00
600.00
1,440.00
792.00
2,400.00
720.00
600.00
1,200.00
2,400.00
2,400.00
1,200.00
1,440.00
1,500.00
600.00
900.00
1,200.00

49,360.00



    A.   OVERHEAD RATE

    Overhead Rate = Annual overhead        
    Billable days available


      $49,360.00         =   $348.83 / day
      141.5 days


      $348.83 day       =   $  43.60 / hour
       8 hour day




    B.   OVERHEAD VS LABOR

    Overhead rate as a % of Labor rate =
      Overhead rate
        Labor rate


      $348.83 Overhead/day     =
      $279.51 Labor/day
        125%


      $43.60 Overhead/hour     =
      $34.94 Labor/hour

        125%



III.   PROFIT MARGIN

    Profit margin should be calculated as a percentage of the sum of the labor and overhead rates. If there are other rates utilized in the calculation of the fees to be charged to the client, these should also be included in the sum prior to calculating a profit margin. It is recommended that you at least attempt to attain a profit margin of approximately 20%.


    A.   CALCULATIONS:

      Labor rate/hour
      Overhead rate/hour
      Total expenses

      + Profit Margin (20%)

      Base billing rate/hour

      $34.94
      43.60
      78.54

      15.71

      94.25


        Round up 94.25 to 95.00
        This adjusts the profit margin from 15.71 to 16.46 (21%)

      Billing rate/hour:

      Billing rate/day:


      $95.00

      $760.00




IV.   INCOME VS EXPENSES: (BILLING RATES)

    A.   CALCULATIONS:

    Income:



    Expenses:

    1 Billable hour

    Total Income:


    Labor
    Overhead

    Total expenses:


    PROFIT MARGIN



    95.00




    34.94
    43.60





    95.00





    78.54


    16.46





    100%


    37%
    46%

    83%


    17%
    Note the difference between profit margin mark-up and profit margins as a portion of revenues.



    B.   ANNUAL BASIS

    Income:



    Expenses:

    1132 Billable hours

    Total Income:


    Labor
    Overhead

    Total expenses:


    PROFIT MARGIN



    107,540.00




    39,550.00
    49,360.00





    107,540.00





    88,910.00


    18,630.00





    100%


    37%
    46%

    83%


    17%



    C.   MARGINS

      Assuming that you meet budget and collect 100% of billable hours, the profit margin available of $18,630. leaves the following margins:

        $18,630.00
        $95.00/hour

        =   196 hour margin/year

        196 hours
        47.2 weeks of work  

        =   4 hours/week margin


    The above examples are simplistic in nature to provide you with a basic method of fee calculation. If you are starting up a consulting business, you might find yourself spending more time marketing, than billing to clients. If you are changing the direction of your consulting business, you might find yourself performing more research and education than billing to your clients. Anything which reduces the total billable hours available significantly impacts the profitability of your business. Anything which increases fixed or direct expenses significantly impacts the profitability of your business. You must be aware of the relationship of all of these issues.



Hosted by:

E-Mail to: info@intap.net


Deion Associates & Strategies, Inc.
Mark S.Deion

15 Sackett Street
Warwick, RI 02886-2333 USA
Tel: (401) 732-0457 • Fax: (401) 732-8767
E-mail: marks@deionassociates.com
URL: http://www.deionassociates.com

Designed &
maintained by:
Beavertail Media
E-Mail to:
keith14@cox.net

Metamedic Award
The Meta Tag experts


Awarded by Netscape's
Open Directory

Privacy Policy This web site, and all contents thereof are COPYRIGHT © 1996 - 2013
DEION ASSOCIATES & STRATEGIES, INC. All Rights Reserved.