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 I walked through in a short video a few years ago, from the book The Marketing Agency Blueprint. 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.
If you work alone, that plus a check on what the market pays is most of the answer. 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. 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 figure includes paid leave, so don’t add it on top of a salary if you’re already accounting for vacation and holidays by reducing available hours.
The common mistake comes next. Most firms divide 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 every job looks profitable on paper 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 only way 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 |
|---|---|
| 1,500 | $140 |
| 1,350 | $156 |
| 1,275 | $165 |
| 1,150 | $183 |
| 1,000 | $210 |
The salary didn’t change and neither did the target. Only the hours available to carry 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, that job owed $900 toward overhead before you made a dollar. 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
A business isn’t really a business unless it’s profitable, so your rate has to leave room for the profit you expect the business to earn, planned in from the start.
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. I’ve called this an hourly revenue target: the rate the firm needs to average across all billable hours to stay healthy, pay the team and hit its profit goal.
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 × 1,300) | 6,500 |
| Hourly revenue target | about $154 |
If the same firm had added 15% as a markup instead, it would charge about $150, 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 |
|---|---|
| 6,500 | $154 |
| 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.
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. Many firms that think their rate is too low have a perfectly good rate that they aren’t actually realizing.
What a blended rate hides
Most firms 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 is fair on unpredictable work. 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.
At our agency we do hourly work, retainers and fixed-price projects, and the most expensive lesson I can point to came from fixed price. On one project, a salesperson described something in a way that set expectations the delivery team couldn’t meet at the price. By the time the gap surfaced, we’d lost the chance to fix it with a change order. We ended up essentially paying the client to let us do great work. Now our delivery team signs off on what sales is promising before it’s signed: that we can produce it on time, on budget and at the expected quality, 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 nothing converts between them except a guess. 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.
- Avoid hourly with a cap. The client’s exposure is limited and yours isn’t, and you usually can’t invoice until the work is done.
- Compare budget used with work done. When hours run well ahead of progress, there’s still time to talk about scope.
For more on keeping the price fixed and the scope honest, I wrote about scope-based pricing, where the answer to a client who wants to pay less is to change what they get rather than discount what you do.
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.
In a pricing walk-through I recorded a few years ago, the base estimate for a project came to 133 hours at $115 an hour, about $15,300 before hard costs. The quote went to $20,000 because of the value of the work to the client, what competitors charged and the level of service required. Projects with more complexity, more stakeholders or more back-and-forth carry what I called brain damage, and the price should reflect it.
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.
Common questions about billable rates
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.
What’s the difference between bill rate and pay rate?
Pay rate is what you pay the person. Bill rate is what the client pays you for their time. In between sits the person’s fully loaded cost, their share of overhead and your profit.
Should every role have its own rate?
Internally, yes. Every role should have a known cost per delivered hour. What you show clients can be simpler, as long as you know what the blend is hiding.
How often should we recalculate?
At least once a year, and any time you hire, change pay, lose a large client or find that your real utilization differs from your plan.
A one-page rate check
The whole article comes down to two calculations.
What you need to earn per hour:
- Annual cost of delivery people: $____
- Annual overhead: $____
- Total annual cost (1 + 2): $____
- Target profit margin: ____%
- Revenue needed: total cost ÷ (1 − target margin)
- Billable hours you expect to deliver and sell: ____
- Average rate needed: revenue needed ÷ billable hours
What you actually earned per hour:
Last year’s delivery revenue ÷ last year’s actual delivery hours = your effective hourly rate
If the second number is below the first, you’ve found out why the work feels busy and the bank account doesn’t.
If you’d like help looking at your pricing and margins with someone who has priced service work for a long time, that’s part of the work I do as a business advisor. You can start a conversation on Work With Me.
