Whether you’re designing a logo or building an entirely new website, one of the most important aspects of any successful project is getting the cost right. Because while a couple missed billable hours won’t make or break your business, consistently not charging enough certainly will.
There are a number of ways to calculate project costs, and a lot of moving parts to consider, but we’re simplifying it down to one important equation for you.
Time (Hours) x Cost of Time + Non-billable Expenses
Now, let’s talk about each aspect of the equation and how to find those numbers.
- Time Spent on a Project
Time seems like a simple concept, but when it comes to agency work, it’s not as straightforward as you think — which is why tracking hours is super important. And the only reliable way to really know how many hours are spent on a project is if every single team member records their time.
We get it. No matter how much you try to plan out a workday, client calls, revisions, pushed deadlines, etc. can make tracking your time a project within itself. But a general understanding of your billable hours is key to keeping your business profitable. It may help to have employees look at their 8-hour day by clients; any significant time spent on a client during that day should be recorded in some capacity. Breaking it down this way will help simplify each record.
- Cost of the Time Spent
Basically, you need to figure out how much one hour costs you for each employee. And this can be calculated in a few ways.
- Fully Loaded Cost
A fully loaded cost covers every expenditure made by your organization and divides it by the total available work hours. For example, let’s say your agency spends $10,000 in the month of June; this includes the cost of labor, office equipment, client gifts — everything. And during that month, your employees are expected to work a combined 200 hours (or their total work capacity). That means each hour is costing your agency $50 (10,000 / 200). You can also break this equation down by role, department, location, and more to understand these costs on a deeper level.
But this equation tends to be a little more complicated because we can only expect employees to work 40 hours a week, every week in an ideal world. Vacations, doctors appointments, sick days — all come into play, making it difficult to distribute costs per project for that time lost. And there are those employees that’ll put in extra hours too, which will also skew your total costs.
Good news for you, Metric.ai does all this calculation for you, accounting for paid time off, holidays, payment cycles, and more, so you can track everything a lot more accurately. Check it out.
- Salary Per Month
Here’s another way to track your costs for time spent more accurately. This equation takes your employee’s monthly salary and divides it by the hours they actually worked within the month to give you the total cost of one hour of work. (If you’re on a weekly or bi-weekly payment schedule, you would just adjust the duration.)
Here’s how it looks. Let’s say you pay an employee $5,000/ month. And they logged 150 hours for June. 5,000 / 150 = 33.33. This is your cost rate for that employee in the month of June. Since no two months will ever look the same, this equation helps you factor in these minor differences so they don’t add up to major profit losses.
- Contractor Cost
Then there’s the cost of any work you choose to outsource. What’s great about this is most contractors work at an hourly rate, so no math necessary. Your cost is exactly what you pay them for the hours of work they completed.
- Non-billable Expenses
The final part of the equation pulls in all the other expenditures that go into running a business, aka your non-billable expenses. These include everything from client dinners, client or employee gifts, travel, events, networking, etc. All of which are important aspects to a successful company, but aren’t making you money directly. This can also include purchases like software licenses or subscriptions for a project that aren’t being directly billed to the client. This part of the equation is just as important to ensure your rates are covering all aspects of your spending.
To learn more about calculating project costs and how Metric.ai can help you simplify the process and increase your profitability, schedule a demo with us today.