🕰️ Est. Time: 5-10 minutes
🎯 Goal: Understand how to calculate cost rates and handle pay rises
🔑 Requirements: Team members to be added into Streamtime, and information on your business overheads and teams salaries
What are Cost Rates for?
Cost rates are crucial when it comes to calculating and reporting on your profit margins across Jobs - so it's important to keep those costs up to date for each team member. In rare cases, you will bill clients hourly, and you may choose to use different rates or a blended rate for their invoices - but it's still important to know your true hourly rate for internal purposes. This helps you understand the value of your (& your team's) time.
In this article, we cover a basic formula to help you calculate your cost rate.
🤓 - you might want to involve your accountant or bookkeeper to help with some of the figures.
The Formula
Salary
Determine your team member's salary.
Example:
$75,000 per annum (salary of your employee)
Working Hours
Figure out the total number of man-hours that your studio bills each year.
Example:
8 hrs per day
x 5 days per week
x 52 weeks
x 1 employee
=2,080
Obviously, you don't expect to charge for every single hour of their time, so some allowances have to be made for vacations, public holidays, sick leave etc..
Example:
7 x legal holidays
14 x vacation days
5 x sick leave days
8 x hrs per day
1 x employee
= 208 hrs off
2,080 - 208 = 1,872 (working hours minus hours off)
Ensure that you also make allowances for non-billable hours, such as marketing, admin, sales etc
Example:
1,872 (working hours) - 468 (25% of 1,872, non-billable time)
= 1,404 billable hours.
Hourly rate considering working hours
Divide the number of billable hours into the annual cost of salary, in order to get the "per-hour" cost of labour.
Example:
$75,000 (salary) / 1,404 (billable hours) = $53 (cost of labour per hour)
Hourly rate + overhead hours
It's also crucial to determine your overhead costs. Overhead costs are all the costs that are required to run the business - such as electricity, rent, equipment etc. Essentially, those are all costs except your teams salaries. These expenses are passed on to a client indirectly building an add-on percentage into billable time. Divide your annual overhead costs by total salary to determine overhead percentage of salary costs.
Example:
$25,000 (yearly overhead costs) / $74,000 (employee salary) = 33% (overhead %)
*The yearly overhead costs number should reflect your studio's total overhead costs divided by a total number of billable employees
Break even rate
$53 (actual hourly rate) + 33% = $70 (p/h rate to break even )
*This is the price per hour to recover the cost of salaries plus overhead expenses
Final cost rate calculation
If you sold every possible billable hour @ $70 p/h, you'd only break-even. However, you also need to make a profit (of course!). Your profit gets your business through rainy days - whether its a pandemic or quiet period - by providing a cushion for slower days. So, add a desired profit margin to the price per hour.
Example:
$70 (p/h rate to break even) + 25% (profit margin) = $88 (actual cost rate).
💸 - This hourly rate represents the minimum rate you can charge to cover your costs of labour and overhead with a profit margin of 25%. Use this rate to determine your in-house budgets.
Calculator
To make it easier, we have built an easy-to-use google sheet to calculate your cost rate.
Handling Pay Rises in Streamtime
So, your team member has just had a pay rise – congratulations to them! 🎉 But what does this mean for your project costs and sell rates?
Here’s what you need to know.
How a new Cost Rate affects Jobs
Here is how that change will affect your previous, live, and future projects:
New jobs will pick up the new cost rate
New items added to existing jobs will pick up the new cost rate
New time logged against existing items/jobs will pick up the new cost rate
Previously logged time will use the original cost rate
If one of your team gets a pay rise you can use the above formula to calculate a new cost rate for them.
What about Sell Rates?
If your team member has a set role and standard billable rate, their sell rate won’t change unless you update their role's rate in your rate card. It's important to ensure that your sell rate reflects the true value of your team member's work and expertise.
When you apply a new sell rate, here's how it will affect your previous, live and future projects:
Where Items are priced by Item Rate:
Items within the Job will retain their rate (i.e. if it was £57 per hour before the change, it will be £57 after the change)
Future time logged will use the current sell rate of the Item (i.e. £57)
Where Items are priced by Role Rate:
Existing Items will retain their previous rate within the Job, but show a visual indicator of the current sell rate of the Item being lower than the sell rate of your team member
Future time logged will use the previous sell rate
If the existing Item rate is amended to reflect the new rate, all previous logged time will be amended to the new rate (i.e. if 5 hours were logged at £100, and you then amend this to a new Sell rate of £150, then those previously logged hours will now show as £750, instead of £500)
New Items added as Role Rate Items will use the new sell rate
Where Items are priced as Fixed Price:
There are two options for Fixed Price Items, so we will cover both.
Where the Fixed Price Item uses a blended hourly rate:
The Item will retain the previous blended hourly rate (i.e. if the hourly rate is £400, and your team members sell rate is £350, then the hourly rate will remain at £400)
Your team member sell rate (reflected in the drop down) will change. This does not impact previous logged hours, or future logged hours - both will use the original blended hourly rate of £400
Where the Fixed Price Item uses Team Member Sell rate:
Existing Items will retain their previous rate within the Job, but will show a visual indicator of the current sell rate being of the Item being lower than the sell rate of your team member
Future time logged will use the previous sell rate
If the existing Item rate is amended to reflect the new rate, all previous logged time will be amended to the new rate (i.e. if 5 hours were logged at £100, and you then amend this to a new Sell rate of £150, then those previously logged hours will now show as £750, instead of £500)
New Items added as fixed price by team member will use the new sell rate
🤓 - if you have a role rate or fixed price by team member rate Item, and need to update the sell rate to your team members new rate, you would need to create an additional Item in order to not affect previously logged time.
I.e. if your Item is Artwork, then you could add an additional item for Artwork 2.0, and assign your team members remaining hours to this.
In summary, a pay rise for your team member is great news, but it’s important to factor in the impact it may have on your project costs and sell rates. By keeping these key points in mind and making any necessary updates to your cost and sell rates, you can continue to deliver outstanding work for your clients while ensuring your team member is fairly compensated.