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Lots of us sell ourselves short by charging our clients too little.
This leaves us scrambling for projects and billable hours to pay the bills.
The first step to being profitable is knowing how much to charge a client.
By calculating each hourly billing rate - the right way, you'll know how much you should charge for every team member to be profitable.
We made an Architect Hourly Billing Rate Calculator to help you easily calculate your hourly rates.
In this article, we'll show you step by step how to calculate the hourly billing rate as an architect.
2 Reasons Why Your Hourly Rate Matters
Are you struggling to make your firm more profitable?
Do you know and feel confident in the rates you are charging your clients?
Both of these problems could be solved easily by setting the right hourly rate and raising your rates.
1 - Know Exactly What to Charge
The biggest reason why your hourly rate matters is so you know exactly how much to charge your clients.
Sometimes, we are just guessing when we set an hourly rate.
Or we use a number we find on the internet or from friends.
Doing this can miss a whole lot of hidden costs in your hourly rate.
Or it doesn’t account for your profit margin - meaning you WON’T make a profit.
Also, a lot of the calculations online are for solo architects.
But, what to do when you run a firm and have multiple people working on a project?
It can get confusing.
By using a simple calculator, you can charge an hourly fee that includes all of your needs and expenses.
You know this fee is reasonable and fair.
Eric W. Reinholdt, a founder of 30X40 put it this way:
“Rather than choosing a billing rate randomly (like I did by asking friends) or by guessing, you'll have the confidence to speak about your financials with your clients and the ability to track your profits throughout the fiscal year.”
- Eric W. Reinholdt, Founder of 30x40
2 - Increase Your Profitability
The easiest way to increase your firm's profitability is by charging the right hourly billing rate.
This is simple math.
By using an equation or calculator to calculate your rates, you include your profit margin into your hourly rate.
That way every billable hour you work will be profitable right off the bat.
Being more profitable is the key to a successful and long-lasting business.
If you are struggling to be profitable, we wrote about other ways to make your architectural firm profitable here.
6 Steps to Calculate Architect Hourly Rate
The goal here is to calculate the Billing Rate, or the hourly rate you will charge clients.
This is also known as the Project Role Billing Rate.
Now, let's go into exactly how to calculate a Project Role Billing Rate.
1 - Calculate Your Direct Labor Costs
The first thing you want to calculate is your Direct Labor Cost.
This is the amount of your employee’s annual compensation that can be billed directly to your clients.
In this example, let’s say you spend $500,000 on Direct Labor Cost.
Next, we look at the Direct Labor Multiplier.
What is a Multiplier?
A Multiplier is a number you multiply your employee’s hourly salary by to cover expenses or profit.
For example, say you have an employee who makes an hourly rate of $57 per hour.
You multiply that hourly rate by some Multiplier.
This new rate tells you what to bill your clients.
By including a Multiplier, you cover more than just the employee’s direct hourly rate in the invoice to the client.
NOTE: Your Direct Labor Multiplier is always set to 1.00.
This just means you need to charge your client $1 in order to pay for $1 of your Direct Labor Cost.
If you want to know more about Multipliers, we wrote a guide to the Key Financial Performance Indicators for Architecture Firms.
2 - Calculate Your Overhead Costs
Next you want to calculate your Overhead Costs.
This is broken up into 2 types:
- Overhead Labor Cost
- Overhead Expenses
Overhead Labor Costs include your employee’s annual compensation that cannot be billed to clients such as an admin or marketing team member.
Overhead Expenses include any annual expenses that cannot be reimbursed from projects such as:
- Employee fringe benefits
- Marketing expenses
Add the Overhead Labor Cost and Overhead Expenses to get your Total Overhead Cost.
For example, if you pay your employees an extra $250,000 for non-billable tasks and all of your expenses add up to another $500,000.
Your total Overhead Cost would be…
$250,000 + $500,000 = $750,000 per year
3 - Calculate Overhead Multiplier and Break-Even Multiplier
Next let’s calculate your Overhead Multiplier and Break-Even Multiplier.
Your Overhead Multiplier gives you a number to multiply your employees' hourly rate by to cover all of your overhead costs.
To calculate your overhead multiplier, divide the Total Overhead Costs by your Total Direct Labor Costs.
For example: Overhead Multiplier = $750,000 / $500,000 = 1.50
This means you need to charge your client $1.50 to pay for $1 of your overhead expenses.
Your Break-Even Multiplier tells you how much you need to charge to cover all your expenses.
This Multiplier doesn’t include profit - an important part of the equation.
To calculate your Break-Even Multiplier, simply add your Direct Labor Multiplier to your Overhead Multiplier.
For example: Break-Even Multiplier = 1.5 + 1.0 = 2.50
This means that to break even in your business, you need to charge your client $2.50 to pay for $1 of your overall costs (minus profit).
4 - Set Your Target Net Profit %
Most importantly, you want to include your profits.
Your Target Net Profit % is the percent of your revenue you aim to have left after all your expenses are paid.
A good starting point is 20%.
You will need to think about what profit you need to improve your firm’s long-term financial health.
5 - Calculate Your Net Profit Multiplier and Net Multiplier
Your Net Profit Multiplier tells you how much you need to charge your client’s to earn the profit you want to make.
To calculate your Net Profit Multiplier use the equation:
Net Profit Multiplier = (Break-Even Multiplier / (1 - Target Net Profit %)) - Break-Even Multiplier
For example: Net Profit Multiplier = (2.5/(1 - 0.20)) - 2.5 = 0.63
This means you need to charge your client $0.64 in order to pay for $1 of your profit.
The Net Multiplier is the Multiplier you use to find the rate to send to clients.
This new rate will pay for all your expenses and earn your profit.
Calculate Your Net Multiplier by adding the Break-Even Multiplier to your Net Profit Multiplier.
For example: Net Multiplier = 1.0+1.5+0.64=3.13
This means you need to charge your client $1.88 in order to pay for $1 of all of your expenses and profit.
Now we’re starting to make money!
6 - Calculate The Project Role Hourly Billing Rate
Then you need to calculate how much to charge for each project role based on the Net Multiplier.
This can be done in 3 easy steps:
- List all of the team members you have with their project role and total annual salary.
- Calculate their salaried hourly rate by dividing the annual salary by 2,087 - the average number of work hours in a year.
- Next, multiply this hourly rate by your Net Multiplier to get your Project Role Hourly Billing Rate.
For example, say you have a Project Architect who makes $57 per hour.
Project Role Hourly Billing Rate = $57 x 3.13 = $178
This means that you should be billing $178/hour for a Project Architect role to make the profit you want in your business.
Plan Your Fee with Monograph
Project Planner allows you to assign roles and team members with dedicated billing rate to each phase at the beginning of your project.
You can also set a standard hourly rate for each project role so you don't have to reinvent the wheel every time you need to figure out a project fee.
Architect Hourly Rate Billing Calculator
We hope this guide helped you understand step-by-step how to calculate your hourly rate.
So now you can…..
- Make more money per hour…
- Invest in yourself and your practice…
- Stress less and enjoy being a firm owner…
You can also use our Architect Hourly Billing Rate Calculator to nail down the exact hourly fee you need to charge for a project. It follows the same formula we listed above, but in an easy-to-use format.