Admin, travel, training, and unpaid gaps reduce billable hours. Dividing by all paid hours usually understates the necessary charge.
Try this with your own numbersFormula and worked example
Hourly rate = (compensation + overhead + profit) / billable hours
| Input | Example |
|---|---|
| Annual owner compensation target | 50,000 |
| Annual fixed overhead | 30,000 |
| Annual profit target | 20,000 |
| Annual billable hours | 1,200 |
| Calculated result | 83.3333 per billable hour |
Choose reliable inputs
Include software licences, delivery time, revisions and ongoing support when costing a project. For this paid media agency calculation, use project time logs, licence invoices and retainer scopes and a consistent definition of one client month.
- Account management: include the portion belonging to this client month or reporting period, and record where the value came from.
- Creative: include the portion belonging to this client month or reporting period, and record where the value came from.
- Reporting: include the portion belonging to this client month or reporting period, and record where the value came from.
Use the same currency for every money input. Do not mix weekly costs with monthly revenue, or count the same expense in both an itemised cost and allocated overhead.
Should I use paid hours or billable hours?
Admin, travel, training, and unpaid gaps reduce billable hours. Dividing by all paid hours usually understates the necessary charge.
Compensation is a business planning input; this is not a payroll or tax calculation.
What if this input changes?
If annual owner compensation target rises by 10%, this example changes by 4.1667 per billable hour. This shows the effect of one change; it does not predict what will happen.
Open the calculator, save your baseline, then change the input supported by the least reliable estimate in your records. Compare both scenarios before committing to a price or capacity promise.