How this number is made
A billable rate has to carry the hours you cannot bill. Utilization is the share of available hours that become an invoice. Overhead is a margin on top so the rate covers costs beyond the income target.
- Available hours are the hours you could work, not the hours you will sell.
- Overhead of 20% means the rate is marked up so costs and profit sit on top of the income target.
Formula
Rate = (income ÷ billed hours) ÷ (1 − overhead). Billed hours = available × utilization.
Worked example
With the figures already in the form, hourly rate to charge is $138.89.
Questions
Why is utilization so important?
A rate built on 2,000 billed hours collapses if you only bill 1,200. The unbilled hours still have to be paid for.
Is overhead the same as profit?
Here it is whatever you need on top of the income target. Split it in your own notes if you want.