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When providing a service on the basis of hours worked, it is necessary to establish a charge-out rate which reflects the total cost per hour to provide the service. The charge-out rate must include salary, a factor for overheads or on-costs and a realistic allowance for profit.
In order to establish accurate charge-out rates for technical staff a practice will need to determine:
- the number of hours worked in a year for each technical staff member
- the percentage of time worked on projects and the percentage of non-project time (which should be allocated to overheads)
- a factor for overheads (see Acumen note Salaries and overheads), and
- a target profit margin (see Acumen note Profit).
The examples set out below are based on a technical staff member on a salary of $80,000 p.a. working a 37.5 hour week in a practice with an overhead factor of 2.5 and a profit factor of 25%.
| Number of working days/year |
| Days | 365 | |
| Less | ||
| Weekends | 104 | |
| Annual leave | 20 | |
| Sick leave | 10 | |
| Public holidays (varies according to practice location) | 10 | |
| Sub-total | 144 | |
| Working days per year | 221 |
Working hours per year (HRS/YR): Apply working days to each member of technical staff x relevant working hours to each member of technical staff while observing all industrial awards.
In this example the working hours for the technical staff member are 1657.5 hours (221 x 7.5).
The cost rate
The cost rate of each member of technical staff is the base rate of salary ($80,000) divided by the number of hours per year (1657.5).
| $80,000 ÷ 1657.5 | $48.25 | |
| $48.25 x 2.5 (overheads) | $120.63 | |
| $120.63 + 25% (profit) | $150.78 |
The charge-out rate for this member of staff is $150.78 per hour.
Overheads
For more accuracy, determine:
a. the percentage chargeable time for each staff member. For example, non-chargeable time could include filling out time sheets, research, educational seminars, product rep meetings etc.
b. the actual overheads incurred by the business, via your accounting software or accountant.
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