Most agencies can tell you their rate. Far fewer can tell you what an hour of their own team costs. Without that second number the first one is a guess, and every quote, every discount and every hire is decided on feel.
The cost of an hour is not the salary divided by the hours in a month. It is what the company pays to have that person available, divided by the hours they actually spend on client work.
What goes into the cost side
- Salary, plus what the employer pays on top. Taxes and contributions differ by country, but they are part of the cost of the hour, not a separate line to remember later.
- Paid time off. Someone on leave still costs money and produces no client hours. Leave does not raise the monthly cost; it lowers the hours you can divide by.
- Equipment, software and the desk. A share of what the person needs to do the job at all.
- Company overhead, kept separate. Rent, admin, marketing and the founder’s own time are real, but they belong to the company, not to one project. Mixing them in makes project margins impossible to compare.
A worked example
Take a designer who costs the company 1,700 a month once employer costs are included. A month has around 168 working hours, but this designer takes leave, sits in internal meetings and does the unbillable work every agency has. In an honest month, 100 hours reach client projects.
1,700 divided by 100 is 17 an hour. That is the cost rate. If the same designer is billed at 35 an hour, the gross contribution is 18 an hour before the company’s own overhead, not 35.
The tour on this site runs the same maths on a whole project, for a more senior team whose blended cost rate is 35: 120 recorded hours at that rate is 4,200 of effort, 1,000 of direct expenses, and on an 8,000 project that leaves 2,800 before overhead. Change the hours and the answer changes with them; change the assumed cost rate and it changes twice as fast.
Cost rate, break-even rate and the rate you quote
Three hourly numbers get mixed up, and each one answers a different question.
| Rate | How it is worked out | What it answers |
|---|---|---|
| Cost rate | What the person costs the company in a month ÷ their client hours that month | What an hour of this person’s client work costs you |
| Break-even rate | Cost rate + company overhead ÷ all client hours | The lowest price per hour at which the company does not lose money |
| Quoted rate | Break-even rate ÷ (1 − target margin) | What to charge so the target margin is left after every cost |
A cost-rate table for a five-person team
The designer above is not the whole team. Here is the same calculation for five roles. The figures illustrate the method; they are not market salaries.
| Role | Monthly cost | Client hours | Cost rate |
|---|---|---|---|
| Designer | 1,700 | 100 | 17.00 |
| Developer | 2,600 | 120 | 21.67 |
| Copywriter | 1,400 | 90 | 15.56 |
| Project manager | 2,200 | 60 | 36.67 |
| Account lead | 2,000 | 40 | 50.00 |
| Team | 9,900 | 410 | 24.15 |
Two things stand out. The account lead and the project manager have the highest cost rates, not because they earn the most, but because few of their hours are recorded against client work. Often that work is client work that was simply never recorded on the project. And the blended rate for the team is 24.15: the figure to use when you price a project before you know exactly who will work on it.
Now add company overhead of 3,000 a month, spread over the same 410 client hours. Every client hour has to carry another 7.32, so the break-even rate is 31.46. To keep a 25% margin after all of it, the quoted rate is 41.95. Quote 35 because a competitor does, and each hour still covers its cost, but the margin is about 10%, not 25%.
What to do with the number
- Set a floor for quotes. No quote below the break-even rate without a reason you can write down.
- Test a discount before you give it. 15% off a 41.95 rate leaves 35.66. The project still covers its costs, but less than half of the margin is left.
- Price a hire before you make it. A new person costs a full month from day one and reaches full client hours only after onboarding. For the first three months, divide by the hours they will realistically record, not by a full month.
Four ways the number goes wrong
- Dividing by calendar hours. 168 hours in the month is not 168 hours of client work. Using the bigger number makes every project look profitable until the year ends and the bank disagrees.
- Using the bill rate as the cost rate. They are different numbers with different jobs. One is what the client pays; the other is what the work costs you.
- Forgetting the people who do not bill. An office manager or a full-time account lead still has to be paid out of the same revenue. Keep them in overhead, consistently, rather than hiding them in project cost one month and not the next.
- Setting the rate once. Salaries change, the mix of work changes, and last year’s cost rate quietly stops being true.
How to keep the number honest
The cost rate is only as good as the hours behind it, and those hours come from recorded time. That is the unglamorous part: if half the team records time on Friday from memory, the denominator is fiction and so is the margin.
- Record time against the project and task it belongs to, not into a weekly total.
- Record internal work too, marked as internal. You cannot calculate what share of the week reaches clients if internal work is invisible.
- Recalculate cost rates once a quarter, after a salary change, and when the team grows.
- Compare the result with what similar projects actually took, not with what you hoped they would take.
Where PLYNTUM fits
PLYNTUM keeps time tracking attached to the project it belongs to, so the hours behind a cost rate are recorded rather than remembered. finance and costs puts reviewed effort, direct expenses and project revenue on the same record, so the margin is traceable back to its source. For a finance lead the picture is the one described on the finance teams page.
If you want a quick read on how exposed your own numbers are, the free business scan asks the same questions this article does and takes a few minutes.
Work it out for your team
The hourly rate calculator runs the same arithmetic with your own pay, overhead and utilization, and shows the break-even rate and the rate to quote.
Once the rate is set, time and billing in PLYNTUM keeps logged hours, project cost and invoices in one workspace.
