Pay rates, cost rates, and billable rates- OH MY!
Now that we have a better understanding of our base pay rates and cost rates, we know that many businesses will just STOP HERE, and use these rates to bill their clients. But if you stop there, you are LOSING money!
In this video, we build a billable rate that includes overhead costs and make a profit.
Check out Part 4 of the Invoicing series, where we start to create PROFIT MARGINS and see it all come together!
Now that we have the cost rate.
So we've got pay rate, what we're paying the person. Cost rate, what we're paying and plus what it actually costs to employ this person to work on the job site.
But then if I go and charge a customer for my cost rate, it sounds like I'm not making any money. So what, what do I need to do to make that next leap to actually be profitable?
You're absolutely right. If you just go out and bill at your cost rate, you'll be making $0 on every hour the guy works. So if you think about, it's like, I don't know about you guys, but The Profit Constructors are in business to make a profit and we want to help all of our clients be profitable. This why we're helping them break this down. So you want to think about now, okay, now just what that individual's hours are costing you. Also, you probably have an office, maybe you have a printer and you're buying printer paper for that. You probably have an administrative support, at least one person or maybe a whole support staff that's back in that office, making sure that, you know, the calls that come in are dispatched correctly. All of that stuff has to happen, too. But those are none of those are billable hours. Right so that's overhead. So now we need to add that overhead to the cost rate. We have to be able to pay all of that stuff as well. And then we also want to make a profit, so we're going to add whatever that percentage of profit is that we desire to make, as long as it's going to make sense in the market. Right, it has to be whatever our cost is that the market can bear when you start to put your bids out. Yeah, but you want to build your billing rate to be that top level of what the market will bear. That also allows you to pay all the overhead and make a profit.
Wow OK, so. Let's say I am a general contractor. We do a little bit of electrician work, we do a little bit of plumbing, we do some framing and drywall and we subcontract foundation work and that type of stuff. And I've been charging $35 an hour for labor, but I can't seem to make ends meet. What you're telling me is that it could be that difference right there.
Most likely it is. You really may not have calculated your cost rate correctly, but you're probably also not making your billing rate what it should be to pay all those extra things.