Determining an employee’s charge-out rate.

A question I frequently get from practitioners is this:

How do I determine this employee’s charge-out rate?

GREAT question.

Here’s the formula I use and how I use it to determine a person’s charge-out rate.

As a general rule, every employee will have a standard charge-out rate. This Standard charge-out rate is generally 3.5 times the person’s wage. Not always 3.5, and seldom EXACTLY 3.5. 

Someone getting paid say $21 per hour will generally have a standard charge out rate of somewhere between $70 and $75 but it could be as low as $50 (especially brand-new employees who don’t have a clue what they’re doing yet) or as high as $80.  Never will the charge out rate be a weird number like some firms do and have it be something like $63.45 per hour.

Note: Almost never is the charge-out rate shared with clients. This is something I avoid as much as I can.  But admittedly, it’s not always possible to avoid. There are times where I will admit and share my or my team’s charge out rate to a client.

The standard charge-out rate is simply my GOAL. What I’d like to ultimately get on average consistently across everything this person does for most of this person’s time.

In a firm like mine, it is not uncommon for a person to have a standard charge-out rate of say $100 per hour, but a charge-out rate of say $75 for travel time to and from client’s place, and the following charge-out rate for the following activity codes:

  • Income tax preparation – $125 – Because this is usually done during very busy time and thus warrants a higher charge-out rate.
  • Income tax review – $135 – Because done during busier time AND requires higher level of knowledge (and less fun than actually doing a return).
  • Tax consulting – $125 depending on how good this employee is at finding creative valuable solutions to tax problems.
  • Business consulting – $120 – Again depending on employee’s ability.
  • Software technical support – $150 – Depending on the software and employee’s proficiency of solving software technical problems.

Now here’s something that’s REALLY important for you to understand. The above is merely a SUGGESTION. Nothing more in most cases. So…

When I do work for Talbot & Associates. My standard charge-out rate is $275 but have a charge-out rate of $400 per hour for doing a Section 85 rollover. If I get this Section 85 done in record time of say 4 hours and this complex transaction saved the client $75,000 in taxes, my bill will likely land between $2,500 and $3,000, and not at $1,600 as my WIP would suggest. As you can see, if I do end up invoicing the client $3,000 which is a good price given the VALUE provided, I will have succeeded in getting myself and EFFECTIVE charge out rate of $750 per hour. Notice that I almost always bill based on the VALUE of the service provided, and not my charge-out rate.

So, how does one determine the VALUE of service provided? 
Several factors are taken into consideration. Following are a few things I consider:

  • Level of expertise required to solve the problem.
  • Amount of taxes I’m saving the client.
  • Hours of work I’m saving the client.
  • Level of stress I’m relieving the client by doing what I’m doing for them.
  • How many other people can provide the service I’m providing.  Needless to say, if only a handful of people know how to do what I do, I will charge dearly for the service, more than if tons of my competitors are capable of doing it.
  • How quickly I’m capable of solving their problem (compared to my competitors).
  • How urgent and important it is to the client the problem be solved NOW and immediately vs later.
  • And I hate to admit it, but to what degree do I like (or dislike) the client.

Above are just a few of the things I think about when I’m quoting fees and doing up the invoice.  

It’s important that you understand that the charge-out rate is only a starting point in determining what I will end up charging the client. It’s important that you and your employees understand this BEFORE you or they provide the service and BEFORE you or your employee quote fees for any service rendered.  And remember, the service is ALWAYS worth more BEFORE the service is rendered than after so try to stay away from providing an hourly rate but rather a price for providing a solution and do so BEFORE you render the service.