Ideal Bill Rate is the rate producing the target profit per hour. Many owners, principals and managers do not take into account all the key elements that make up an ideal bill rate. To determine the ideal rate, you need to know not only the profit margin but also the utilization rate of your employees and their overhead multiplier.
The calculations involved are:
Utilization Rate = (Direct Payroll Cost / Total Project Cost) x 100
For example, if the direct project labor is $10,000 and the total project cost is $14,000, then the utilization rate according to the formula is:
Utilization Rate = (10,000 / 14,000) x 100 = 71.4%
Next, you have to compute the effective bill rate before finding the ideal bill rate.
Effective Bill Rate = Bill Rate x Utilization Rate
For example, if the regular bill rate of an employee is $100 per hour, then:
Effective Bill Rate = 100 x 71.4% = $71.4 per hour
Now let us calculate the Overhead Multiplier (OHM) as:
OHM = Total Expenses / Total Payroll Expenses
If the total expenses incurred in a year are $1,000,000 and the payroll expenses amount to $400,000, then:
OHM = 1,000,000 / 400,000 = 2.5
Finally, you can calculate the ideal bill rate as:
Ideal Bill Rate = (Pay Rate x OHM x Profit %) / Utilization Rate
If the pay rate of the employee is $30 per hour and the profit percentage is 20%, then:
Ideal Bill Rate = (30 x 2.5 x 1.2) / .714 = $126 per hour
What this means is that if an employee has a pay rate of $30 and bill rate of $100 with 71.4% utilization, you should ideally charge the client at $126 to make a 20% profit.