Learn how pay rates, cost rates, and billable rates impact profitability.
Pay, cost, and billable rates are important accounting terms. They tell you about the money coming in and going out of your business (cash flow). And together, they determine your profits.
Here’s an overview of what they are and how you can manage them.
Learn about cost types and terms
What’s pay rate?
Pay rate is the amount you pay a worker (employee or independent contractor) to do work for a set amount of time. This is also known as a wage.
For hourly workers, the pay rate is their wage per hour. For salaried employees, the pay rate is usually calculated by month or year.
Pay rate is only what you pay your workers. It doesn’t include the additional costs to your business such as benefits, overhead, or employer taxes.
What’s cost rate?
Employee cost rate is the total cost for an employee to do work for your business. This typically includes wages (“pay rate”), benefits, overhead, and taxes.
| Pay rate + overhead + employer taxes + any additional expenses =
employee cost rate |
Overhead isn’t a single cost but made up of many different costs. Some costs may be relevant to your business, others may not. Follow the link if you need help calculating your overhead.
The cost rate for products includes the purchase price (from vendors), manufacturing expenses, and shipping costs. These are just a few things that can make up your cost rate for products.
| Purchase costs + additional expenses = productcost rate |
Manage your pay rates, cost rates, and billable rates
So, how does this all add up?
Pay rates and cost rates represent expenses to your business. Billable rates, on the other hand, represent potential income.
| Sales (income) - cost rates (expenses) = profit from a sale or project |
These rates are all manageable. How you manage them (job costing) depends on your business plan and customers. There’s no single right way to do it. Keep these in mind as you’re managing your business and projects:
- Make sure you’re paying your workers fair wages that are sustainable for your business.
- Review your products and services as often as possible. Use financial reports to see what's selling well. Adjust your billable rates as needed.
- Make sure you're accounting for yourgeneral overhead expenses, not just direct costs for projects or running your business. Otherwise, it may feel you're making more money than you actually are.
- Some costs, like employer taxes, are outside of your control. Make sure you’re planning ahead for these types of costs.
FAQs
Pay rates and cost rates represent expenses to your business. Billable rates, on the other hand, represent potential income. These rates are all manageable. How you manage them (job costing) depends on your business plan and customers.
What is the difference between pay rate and billable rate? ›
Key Points. Understand the difference between pay rate and bill rate and know which rate you are discussing when speaking with a client or recruiter. Pay rate is the amount of money workers are paid per hour, week, etc. Bill rate is the amount a company or professional charges per hour of work.
What is the difference between billable rate and cost rate? ›
Cost rates allow you to keep track of internal costs and billable rates allow you to generate a billable amount to charge your clients. By setting these rates, you can track your projects' progress and get paid for the work you do.
What is the cost rate and bill rate? ›
The cost rate is your internal rate - what an employee or contractor costs you as a business. Cost rates apply to any time a user tracks. You can apply it from a particular date to save the previous results. The billable rate is the external rate you charge your client.
What is billable cost? ›
A billable rate is a price. A business owner sells their products or services at particular prices. That's actually what a billable rate means.
What is a pay rate example? ›
If you make $20 per hour and worked 45 hours total one week, you'd multiply your hourly rate by the hours worked. This would be 20 x 45 = 900. To find your overtime amount, you'd multiply one-half your hourly rate by the number of hours you worked that equaled over 40 in the past week.
How do you explain pay rate? ›
Pay rate refers to the monetary compensation an employee receives for their work. Basically, it's how much money your employees get for the work they do—which can include different types of pay like overtime, tips, and bonuses. This rate of pay is going to be a big part of an employment agreement.
What is an example of a billable charge? ›
Everything from travel expenses, project materials, or subcontractor fees can fall under the billable expense category. For example, as a caterer, you may have a line item for ingredients and raw materials in your invoice. These items will be used to prepare the meal and won't likely be reused in other jobs.
What does billable hourly rate mean? ›
What Is Hourly Billing? The hourly billing rate is the amount you charge to your clients per hour of work put in to complete their projects. To bill your clients by the hour, you need to track every employee's working hour spent on the project, including everyday tasks related to the project's completion.
How are billable rates determined? ›
Determining bill rates
When you set your bill rates, consider the following: Cost of work: This includes staff salaries and benefits, as well as overhead costs of non-billable people, rent, and other operational expenses. Utilization differs per organization, but it's typically in the range of 50% – 75%.
Cost bill, also referred to as bill of costs, is an itemized list of court costs incurred by the prevailing party in a lawsuit. The prevailing party submits this list to the court and the losing party after a judgment has been issued in the case.
What is the billing rate of a contract? ›
The amount a contractor charges a client to utilize a resource rate, also known as the Billing Rate. This is the Unit Cost multiplied by the number of hours utilized.
What is max bill rate? ›
What is Max Bill Rates? Staffing agency bill rates that are capped at a maximum level by job title, agency, or geography. Candidate pay rates are determined by the agency. Also known as “not to exceed” bill rates.
What does 80% billable mean? ›
To state a billable hour example, suppose the contract of a ten-hour project states that 80% of the total working hours will be considered billable. In this case, the client will pay the consultant eight hours even if they have spent ten chargeable hours.
How to calculate billable hours per employee? ›
Calculating billable hours is straightforward: you take how much you've worked and multiply it by your hourly rate. But, the complications arise when you charge different fees to different clients, or when you have a diverse team doing differently paid work, and you need to factor in all those different rates.
What is considered billable? ›
Billable hours are the hours spent working on client projects. Non-billable hours are any that are spent on administrative or overhead projects that are not directly related to client service. For example, sending emails to clients would count as billable time.
What is the difference between billable and non-billable salaries? ›
Billable hours are the time spent on tasks that can be directly billed to clients. Billable tasks contribute to the completion of projects and are typically associated with revenue generation for a professional service agency. Non-billable hours don't directly progress a project and aren't billed to the client.
What is the difference between billable and non-billable pay? ›
What is the difference between billable and non-billable hours? Billable hours are the hours spent working on client projects. Non-billable hours are any that are spent on administrative or overhead projects that are not directly related to client service.
What is included in a billable rate? ›
The billable rate is the rate you charge each client to provide your service. How do you get it, and how do you pick one that actually makes you money? Seems simple enough, right? But let's make sure you understand how to accurately get these numbers, so that the billable rate remains an accurate calculation.
