The First Step To Determining Profit - Calculating Full Burden For Billable Staff

In working with literally thousands of IT business owners all over the world, the one universal question that is asked and must be answered in order to determine true profitability (no matter what your service delivery model is) is "how do I determine my full burden for billable staff"?

To calculate full burden for billable staff, first calculate Hourly Labor Burden for billable staff, then Hourly Overhead Burden (including non-billable staff), then add these together for your hourly full burden for billable staff.

To calculate Labor Burden for billable staff, divide all their labor costs above and beyond gross compensation by 2080 (work hours per year). These costs may include, but not be limited to:

• Total Compensation
• FICA
• FUTA
• SUTA
• Disability
• Workers' Comp
• Healthcare
• Sick Leave
• PTO
• Vacation
• Holiday
• Profit Share/Pension/401k
• Retirement
• Additional Bonus

For instance, if you had 8 billable staff whose total Labor Burden equals $250,000, your formula would look like this:

$250,000 ÷ 2080 = $120.19/hr.

To calculate Overhead Burden, total the yearly amount of all company overhead costs (including indirect labor costs), then divide by the number of staff, and again by 2080 for your hourly Overhead Burden rate. These costs may include, but not be limited to:

• Total Non-Billable Staff (Indirect Labor) Compensation (see above for these costs)
• G/L Insurance
• Picnics, Parties
• Tool/Gas/Vehicle
• Company Meetings
• Training/Education
• Cell/Mobile/Internet
• Vehicle Fuel/Maint./Insurance
• Miscellaneous
• Electricity
• Gas
• Heating Fuel Oil
• Water & Sewage
• Rent
• Equipment and Maintenance
• Clothing
• Telecom
• Office Supplies
• Postage
• Cleaning & Maintenance
• Bank Charges
• Payroll Taxes
• Property Taxes

For instance, if your total yearly Overhead Burden amount equals $500,000 and you have 20 non-billable staff, your calculation would look like this:

$500,000 ÷ 20 ÷ 2080 = $12.02/hr.

Now add your billable staff’s Labor Burden per Hour and Company Overhead Burden per Hour together to get your billable staff’s Full Burden:

$120.19 + $12.02 = $132.21/hr.

So if we wish to make a 50% margin on labor, our formula would look like this:

$132.21 + 50% = $198.32/hr.

Now I'm not an accountant, so please don't take this definition as gospel - please work with your financial team to determine your own full burden per billable employee, then you'll know how much to add to this hourly rate in order to reach your desired labor margin.

For all you MSPs out there, next time we'll explore how to determine the margin for your service desk team.

Erick Simpson 
MSP University
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Comments

[Erick Simpson]

Hi Robert;

Thanks for your thoughtful post. In the formula I described, the unbillable time you mention(PTO, Holiday, etc.) is a component of the total labor burden for billable staff. This means that we end up paying for it whether we can bill against it or not. In order to achieve a true reflection of hourly labor burden and overhead burden we must include all of our labor costs, not just the percentage of labor costs directly related to billable hours.

If I've misread your post, please correct me, and thanks for contributing to the discussion.

Thanks,
Erick

[Robert C Betzel]

Erick,

I think this is something that everyone should know to run an effective business. But I do have a few questions/comments about your formulas. To get the average fully burdened rate for billable labor you need to divide the total burdened cost by the number of billable staff and then by 2080, right? Now the issue with that is you are not taking into account unbillable time PTO, Holidays, breaks, and time you just can't bill for (travel, down time, admin time). What we do is back the number of PTO hours, Holiday hours, and breaks out of the available hours then we reduce what is left by a percentage that we think we won't be able to bill for (say we can only bill 80% of available time) then we divide the burden per employee to get their individual burden rate and then average all of the rates together. As for getting the over head burden you need to divide that amount by the number of billable staff again and use the number of available hours you came to in the first calculation. If you divide by the number of non-billable staff you will never cover the cost in your billable staffs hours. Once you have that then you can decide your profit and markup you labor from there. Now this also doesn't take into account if you actually sell product or resell services as the GP from those should also contribute to paying for overhead. If you don't do that your billable rate may be too high for your market. Now I may also be wrong so please feel free to correct me as needed. But either way we should all know what it costs us per hour per employee to run our business and whether we are charging enough to cover hour expenses and make money to take home.

Regards,

Robert C Betzel
President
Infinity Network Solutions, Inc.

[Erick Simpson]

Hi Brad;

Thanks for your post. I kept the calculation simple to determine overall labor burden for total billable staff, no matter the number . You can certainly break these out individually, as well as the time spent per activity to give you more granular detail against each resource and client.

[Brad Kowerchuk]

Erick,
Great topic, and I look forward to the followup post.

Question - for the first calculation of billable staff burdened cost, you have not divided headcount, whereas for the 2nd calculation of non-billable staff you have. Why the difference?

Thanks,
Bradk