I posted an item on this blog last month on the subject of Setting fee rates – using costs incurred or value provided?

Related to that issue is the question as to: How do you set charge out rates?

A third, a third, a third

When I started in practice over 30 years ago (yup, I’m that ‘old’) the traditional approach was to set rates at about 3 times salary costs.  The idea being that for each hour you worked you would generate 3 times the cost of that for your employer.  The charge out rate being equivalent to one-third salary, one-third overhead and one-third profit.

It was never quite that simple of course. There are lots of ways of computing the hourly equivalent of an annual salary for example. And also for identifying which overheads should be taken into account – in practice I don’t think anyone worried too much about that. It was the principle that was important.

The hourly salary cost of someone earning £1800 a year (which is what I started on) might have been computed as follows:

365 days less weekends less bank holidays less training days = 228 working days.

At 7 hours a day (which is what we worked then)  you get to c1600 hours a year.  Salary per hour = a pittance (even adding employer NICs). And charge out rates would have been under £5 per hour.  Seems incredible looking back.

100% markup

In the old days(!) overheads were higher than they are now – in many ways. There is now more flexible working, fewer offices, more open plan areas, less secretarial support and more hot desking. Technology has also made us more efficient. And of course salaries have risen faster than fee rates. (Haven’t they?)

As result a more modern approach is to set charge out rates at simply double the salary costs. This leaves 25% towards overheads and 25% profit.

Banding

It’s often the case that staff compare their charge out rates and seek to identify each others’ salaries – and those of their managers. In practice it is far better to band staff at a particular level together and to give them one standard charge out rate regadless of their precise salary.  This also ensures that the client doesn’t benefit or lose out because staff member A did the work rather than staff member B.

Fundamental

I must refer back again to my earlier posting Setting fee rates – using costs incurred or value provided?

Clients will often ask about your charge out rates and seek to compare them with those of other advisers. Ultimately though they are more concerned about the level of the fee for the work that you do and the problems that you solve.  Many firms are moving away from publishing their charge out rates. Instead they quote fees for the job.  Some have abandoned time sheets altogether. Others still keep timesheets to assist the partners in determining the relative profitablity of different types of work and of the work performed for different clients.

I’d welcome examples of how you set the charge out rates in your practice, and other approaches that you have encountered.

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