Business Development Tips & Tricks

Newsletter #1: Calculating Profitability for Contract Employees

This week I had the challenge of calculating the contract bill rate for a small software client. Properly calculating your bill rate is crucial to ensuring a proper gross margin, when providing contract labor.

One of the many issues companies forget is that there are additional expenses after direct cost of your employees.

But there is a quick way to estimate your bill rate when quoting your customers.

The 5 Levels of Cost for hiring an employee

Direct Cost: Wages, Taxes, Unemployment, Workers Comp
Benefits: Health insurance, retirement, perks, fringe benefits
Direct Management Costs: Recruiting, training, equipment (PPE, computers, furnishings), Non-Billable Management Overhead
Cost of Sales: Commission or rate for Sales and Marketing
Gross Profit

Example: Home Health Care ($15 / hour)

Direct Cost: $30,000 + 10.95% + $1750 = $35,035
Benefits: $0
Direct Mgmt.: $40,582.5 / 3 FTE's / 5 = $2,706
Markup (40%) $37,740 / .6 = $62,900
Cost of Sales: .15% = $9,435
Gross Profit / Gross Margin: $15,725 / 25%

Whew! That's a lot of math. Now there is a lot more to explain to catch this fully, but let's assume you are paying $135,000 / year for a software engineer with benefits and a 3% 401k match.

Example: Software Engineer ($135,000 / Year)

Direct Cost: $135,000 + 10.95% + $378 = $150,161
Benefits: (Med) $11,736 + (401k) $4050 = $15,786
Direct Mgmt.: (DM)$11,000 + (Recruiting)$20,250 = 31,250
Markup (40%) $197,197 / .6 = $328,661
Cost of Sales: .15% = $49,299
Gross Profit / Gross Margin: $82,165 / 25%

My Business Development Tip of the week.

Divide the Annual Wage by $1,000 to find the hourly bill rate."

$30,000 / year = $30 / hour

$135,000 / year = $135 / hour

What if you are both the business owner and the worker such as a 1099 Contract Worker? The same rule applies.

If you want to make $50,000 / year, then you should be charging $50 / hour.

Each Monday morning at 10am Eastern, I publish my FREE Business Development Tips & Tricks Brief based on work that I am doing for my current clients.

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You can read more on: Shawn Bailey's Small Business Insights Weekly which is the paid version of this newsletter, where I go behind the scenes with multi-media content, interviews and in-depth analysis.