A billable hourly rate has to cover three things: what the person doing the work really costs, their share of everything else it takes to run the firm, and a profit. Divide that total by the hours they can actually bill, and you have the rate.
The quickest version is a rule of thumb from Paul Roetzer’s book The Marketing Agency Blueprint. It’s a useful starting point, and not much more. Take the hours in a year, subtract holidays, vacation and sick days, and multiply by the share of time the role can realistically bill. Then multiply the role’s salary by three and divide by those billable hours.
For a $70,000 salary at 65% utilization, that’s $70,000 × 3 = $210,000, divided by about 1,275 billable hours, or roughly $165 an hour. The 1,275 assumes about 15 days of holidays and time off, leaving roughly 1,960 hours, times 65%. More time off means fewer hours and a higher rate.
If you work alone, the same method applies with one person in it: put a realistic salary for yourself in the cost, then check what the market pays. If you have employees, the number to trust is a different one: the revenue the firm needs in a year divided by the hours it will realistically deliver. The rule of thumb hides the decisions that determine whether you make money, and the rest of this article is about those.
Pay rate, cost rate and bill rate
Three numbers get mixed up in most conversations about billing rates.
- Pay rate is what you pay the person, per hour.
- Cost rate is what the person really costs you per hour once payroll taxes, benefits and other employment costs are included. People also call this the fully loaded or fully burdened labor rate.
- Bill rate is what you charge the client per hour.
The gap between cost rate and bill rate has to pay for everything that isn’t billable work, and leave a profit.
Step 1: Work out the cost of a delivered hour
Start with what the person actually costs you in a year: salary, employer payroll taxes, health insurance, retirement contributions, bonuses, and the equipment and software that belong to them. Whatever you put here, leave out of overhead. Use your payroll and benefits records for this. As a reference point, the U.S. Bureau of Labor Statistics found that in June 2026 benefits made up 30 percent of total employer compensation costs for private-industry workers. That’s 30% of total compensation, which works out to about 43% on top of wages, not 30%. It also includes paid leave. Use your own payroll and benefits costs rather than the national average, count the leave cost once, and still take vacation and holidays out of the hours a person can work.
A common mistake comes next: dividing that loaded cost by 2,080, the hours in a full-time year. That gives you the cost of an hour paid. What you need is the cost of an hour delivered, which means dividing by the hours the person actually bills.
With illustrative numbers: a $70,000 salary that costs you about $90,000 a year once payroll taxes, insurance and retirement are in costs about $43 per hour paid. At 1,275 billable hours, it costs about $71 per hour delivered. Price your work against the $43 and jobs look more profitable than they are while the firm quietly loses money.
Step 2: Be honest about utilization
Utilization is the share of available hours a person spends on billable work. Nobody bills every hour. Meetings, internal work, training, sales support and the ordinary friction of a working day all take time.
In my own pricing examples I’ve used 65% for a typical role and 75% for a team focused on delivery. The right number for your firm should come from your own time tracking. At our agency, every team member tracks time to the task. It’s a pain, and it’s the most reliable way I’ve found to know what your hours really are.
Set utilization separately for each role. A designer or developer may bill most of their week. A project manager, account manager or practice leader may bill a fraction of it, and some roles bill nothing at all. The billable people have to carry the ones who don’t.
Utilization also depends on demand. A developer might be able to deliver 1,500 hours a year while clients only buy 1,150 of them. Keep three numbers separate: what a role could deliver, what you’ve planned and sold, and what actually happened. Don’t set your rate assuming you’ll sell every hour your team could theoretically deliver.
Small misses move the rate more than most owners expect. Using the $210,000 from the rule of thumb above:
| Billable hours in the year | Rate needed |
|---|---|
| 1,550 | $135 |
| 1,350 | $156 |
| 1,275 | $165 |
| 1,150 | $183 |
| 1,000 | $210 |
The salary didn’t change and neither did the target. Only the billable hours available to recover them did.
Step 3: Add your share of overhead
Overhead is everything it costs to exist as a company, separate from any specific client’s work: leadership, sales, finance and admin salaries, rent, software, insurance, accounting, and the hours of anyone who doesn’t bill.
A useful way to sort a cost is to ask whether a specific client caused it. If yes, it’s a delivery cost. If it exists because you’re a company, it’s overhead, and every project across the firm has to carry its share.
Be careful with people who bill part of their time. If you’ve already divided a project manager’s whole cost by their billable hours in Step 1, their non-billable time is already in their delivered-hour cost, so don’t add it to overhead as well. Either spread a person’s whole cost across their own billable hours, or split it between delivery and overhead. Pick one approach and use it every month.
This is where a job can be profitable on its own and still lose money for the firm. If a month of work costs $2,600 to deliver and you bill $3,000, it shows $400 of gross profit. If your overhead runs at 30% of revenue across the company, a $3,000 job needs to contribute about $900 to cover its share. This one contributed $400. A book full of those jobs is profitable on every project and losing money as a company.
Step 4: Build in profit, and know margin from markup
Profit isn’t what’s left over if the year goes well. It isn’t an expense on your books, but it has to be planned into the rate from the start. By profit I mean operating profit after everyone has been paid a normal salary for their work, owners included. If you’re delivering work for less than you’d pay someone else to do it, the profit you see is partly your own unpaid time.
This is where a lot of rates go quietly wrong, because margin and markup aren’t the same thing.
- Markup is profit as a percentage of cost. Cost $100, add 30%, charge $130.
- Margin is profit as a percentage of price. At $130, the $30 profit is a 23% margin, not 30%.
To get a true 30% margin on a $100 cost, divide cost by 0.7 and charge about $143. The difference looks small on one hour and adds up to real money over a year.
A clean way to set the target is to work backward. The margin your delivery work needs is roughly your overhead as a percentage of revenue plus the profit you want to keep. If overhead runs at 30% of revenue and you want 15% profit, your delivery work needs to run at about a 45% gross margin across the book. That only holds if you define delivery cost and overhead the same way every month. Decide which salaries and expenses sit on each side and leave them there.
Check it at the firm level
Calculating role by role is useful. Checking the whole firm is how you know the rate actually works. Think of it as an hourly revenue target: the rate the firm needs to average across all billable hours to cover its costs and earn its profit target. It’s a planning average, not a test every project has to pass. A project below it can still contribute well if it uses people who’d otherwise be idle, and one above it can lose money if it needs expensive people or outside costs. If you use freelancers or subcontractors, add what they cost to the total.
An illustrative example for a small service firm:
| Loaded cost of 5 billable people | $500,000 |
| Overhead, including non-billable staff | $350,000 |
| Total cost | $850,000 |
| Target profit margin | 15% |
| Revenue needed (cost ÷ 0.85) | $1,000,000 |
| Billable hours (5 people × 1,250) | 6,250 |
| Hourly revenue target | $160 |
If the same firm had added 15% to its total cost as a markup instead, it would charge about $156, collect about $977,500 and end the year with a 13% margin, about $22,500 less profit than it planned.
The same target, if billable hours come in under plan:
| Firm billable hours | Average rate needed |
|---|---|
| 6,250 | $160 |
| 6,000 | $167 |
| 5,500 | $182 |
| 5,000 | $200 |
If your actual billable hours came in 10% below plan last year, does your current rate still clear your costs and your profit target?
Revisit this number often. It moves every time you hire, change a salary, lose a client or find out your real utilization is lower than you assumed. I’ve seen how quietly that happens: prices I set from our own calculators were right when I built them, and a couple of years later the company they described had changed, with different people and different costs. A rate is only as current as the assumptions under it.
Run your own numbers
Put your own figures into the calculator. It does the firm-level check above, compares margin with markup, and shows what a short year does to the rate.
Work out the rate your firm needs
The figures start on the made-up five-person firm from this article. Use annual numbers throughout. Replace them with your own. Every line is an assumption you choose.
If billable hours come in under plan
| Billable hours | Rate needed |
|---|
What you actually earned (optional)
A firm-wide average revenue target under your assumptions, not a price for any one project. Individual prices and margins will vary. Nothing you type here leaves your browser.
What you actually earned per hour
Your target rate is a planning number. Your effective hourly rate tells you what happened:
Effective hourly rate = delivery revenue ÷ actual delivery hours
If you sold a $20,000 project and it took 160 hours to deliver, you earned $125 an hour, whatever rate you used to build the estimate. If you planned for 100 hours, you meant to earn $200.
Compare your effective rate with your target every month, by client and by type of work. When it falls short, the gap tells you where to look: estimating, scope control, who did the work, or the price itself. A firm that thinks its rate is too low may have a perfectly good rate it isn't actually realizing. If your effective rate is below your target, you've found out why the work feels busy and the bank account doesn't. Count every hour worked on client work in that sum, including overruns, corrections and anything you didn't bill.
An effective rate measures what you collected for your time, not whether you made money. A shortfall usually comes from one of three different problems, and each has a different fix:
| Problem | What's happening | Where to look |
|---|---|---|
| Not enough sold | People have time, but there isn't enough work to fill it | Demand, sales and how many people you carry |
| Hours not recovered | People work hours the price doesn't cover | Estimating, scope control and delivery |
| Delivery costs too much | The revenue is fine, but the people or outside costs on the work are too expensive | Who does the work and what you buy in |
Raising the rate only fixes the second, and only if the market will pay it. And a firm can hit its rate and still run short of cash if clients pay slowly or work sits uninvoiced, so watch both.
What a blended rate hides
It's common to sell one rate, or a few, even though their people cost very different amounts. That's sensible for the client, who doesn't want a menu of 12 rates. It's dangerous inside the firm if the blend starts to hide what's happening.
The rule I'd use is to blend the sell, never blend the cost. Charge a simple rate if you like, but keep track of who actually did the work. Profit comes as much from who does the work as from what you charge. If work that was priced for junior people drifts to senior people, the price stays the same and the margin disappears, with no warning on the invoice.
Meetings are where this shows up first. One flat rate for a meeting with six people from your side can lose money on the hour. Bill every person separately and clients start cutting people from calls, sometimes the people who most needed to be there. Neither is a reason to avoid a blended rate. Both are reasons to price meetings and coordination as the real hours they are.
Hourly or fixed price
Every pricing model rewards something.
- Hourly works well when the scope is unpredictable. It also rewards slow work, punishes efficiency and makes clients watch the clock.
- Fixed price rewards finishing a defined scope, and it punishes vague scope.
Some of the most expensive mistakes in my own agency came from fixed price, and most of them started with a misunderstanding: a promise in a sales conversation that the delivery team couldn't meet at the price. I told the story in this short video.
The fix was a sign-off. Delivery now signs off on what sales is promising, at the price stated.
The most important rule is to put hours under every fixed price. Selling in units, like pages, campaigns or deliverables, while your costs are incurred in hours means the only thing connecting them is your estimate of the hours. Estimate the hours, price from your rate, then present the price however the client prefers.
A few more keep fixed price honest:
- Separate corrections from changes. A correction means the work doesn't match what was approved, and that's on you. A change is something new, and that's a change order.
- Price change orders above the project's margin. The original price also had to pay back the cost of winning and planning the work, and a change brings its own coordination and disruption. Don't discount extra work because the project is already sold.
- Avoid hourly with a cap. The client's exposure is limited and yours isn't, so you take on the downside of fixed price without the upside. If you agree to one anyway, define the scope, bill regularly and get a new authorization before the work passes the cap.
- Compare budget used with work done. When hours run well ahead of progress, there's still time to talk about scope.
I've written separately about scope-based pricing, for when a client wants the price to move.
Your rate is the floor under the price
Your target rate is the average the business needs to earn per delivery hour across all the work it sells. It doesn't tell you what any particular piece of work is worth.
Take a made-up example: a project estimates at 120 hours at $160 an hour, about $19,200 before hard costs. The quote might reasonably go to $24,000 because of the value of the work to the client, what competitors charge and the level of service required. Projects with more complexity, more stakeholders or more back-and-forth carry what I've called brain damage, and the price should reflect it.
The calendar costs money too. A project that runs ten months instead of six should cost more, even when the hours look similar, because coordination is a few hours every week for as long as the project lasts.
Who does the work matters too. When I review an estimate, I want each activity broken out by the people it needs, including everyone who sits in the kickoff meeting. If senior people have to do all of it, I hold the price firmly. If parts can go to people who cost less, there's some room, though I'd still rather sell it at the full price.
Moving above the average is a judgment call. Pricing a particular engagement below it can make sense too, if you have unused capacity, if the work leads to better work, or if the staffing on it costs less. Just make that decision on purpose, and know which other work has to make up the difference.
When the market won't pay the rate you need
Sometimes the calculator says you need a rate your buyers won't pay. Raising it anyway isn't the only answer, and often not the first one. Check, in roughly this order:
- Is the market really capped there? Look at your win rate and why you lose, not one prospect's reaction.
- Is the staffing right? Senior people doing work that others could do pushes your cost up without raising what the client will pay.
- Are you selling enough of your capacity? If people sit idle, the fix is demand or headcount, not price.
- Can overhead come down? Every dollar out of overhead lowers the rate you need.
- Is it the right work? Some services or clients use a lot of scarce time and contribute little. Changing the mix can do more than changing the rate.
Is 1,800 billable hours a year a lot?
Yes, for most client-facing roles. A full-time year is about 2,080 paid hours, and after holidays and time off there are fewer than 2,000 available. 1,800 billable hours means billing over 90% of the available time, which leaves little room for meetings, training, sales support or internal work. It can happen in production-heavy roles. As a firm-wide plan it usually means the rate is built on hours you won't get.
Pricing and margin reviews for firms that sell their people's time are part of my business advisor work. If your rate needs a second look, send me a note.
