You are on page 1of 10

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 WONT 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 weeks
Sick 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 dont 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 dont
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
Overhead Rate
Profit Margin
Total Charge out rate

$ 69.56
$ 21.73
$ 9.12
$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. Dont 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 business
Because 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 or
Are 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

You might also like