A question that comes up a lot for us when we are implementing management systems for our clients is: ‘What’s the best way to calculate cost and sales rates for projects and how should we reflect that in our systems to get accurate project profitability?’. A cost calculator can get you there. But there are some things you should consider first.

Firstly, when it comes to cost rates, I do not recommend trying to estimate cost rates at an individual level. It’s an administrative nightmare to maintain and control from an access point of view. The rates should be per labor grade or role level.

Secondly, these rates need to be “fully loaded” costs. That means that you need to allocate indirect costs to the roles so that you have rate that recovers the total cost of the employee and not just her salary.

We have developed a cost calculator to help with this and you can find it here.

I understand that sales rates, especially for agencies and pitching work, are rather arbitrary BUT you must know what your cost rates and target billing rates are because:

• You need these to know if you’re making your budgeted margins.
• It gives information so you can at least cover your costs when pitching new work.

There are few things that you need to bear in mind to do this effectively.

It’s as much an art as a science

As much as we would like to be able to accurately estimate cost & billing rates, it’s an impossible exercise because estimated rates are based on estimates of costs, total hours, and billable time that the team will work.

I’ve seen a few systems that proport to provide rate information as one of their ‘features’ however this can only be done retrospectively. They will give you the actual cost and billing rate achieved in the past but that does not guarantee that these will be the rates in the future.

You can never beat the market

Pitching is becoming the norm in this industry so pitch value is more related to the market than internal costs. That may lead to the temptation that estimating rates is a futile exercise but argue the opposite. As I pointed out in the introduction, it’s more important than ever that agencies understand their cost rates so that they know the lowest price, and therefore what their “walk away” point is.

Track the overs and unders

I wrote about over-recovery and under-recovery of costs in a previous article. Once you enter your estimated or standard costs track them to make sure that they accurately reflect the actual situation. Be prepared to adjust these on a quarterly or (in extreme cases) a monthly basis.

Big picture

Finally, don’t forget the big picture and don’t get sucked into the detail. The overall objective of the agency is to deliver great work that delights your clients and make a reasonable profit. This tool gives you the information you need to quote/pitch work at a reasonable rate that should meet your target margins.

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Once again, you can find the free cost calculator here