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Part 8: How to Set Rate Tables For Your A/E Firm
The term “Rate Table” assumes that there is more than one person available to do the work at your firm. It also assumes that you have multiple people on your staff with different experience levels and technical backgrounds. The concept for calculating your rate tables is actually pretty easy. The difficult part is figuring out where you want to place your rate table relative to your competition. As in most cases in business, the determination for value of work has a significant impact on how fast or slow your company may grow.
To start from the top, the very first thing you need to have accomplished is your break-even analysis. I will get into further detail on this topic later on in this series when we jump into the actual business plan, but for now you should make sure you understand the concepts presented by Aaron Mitchell in his article Overhead, Profit, and Everything In Between: Part 3. Aaron shows how an individual can go about calculating their break-even multiplier. This multiplier will help you essentially figure out what you “need” to charge for everything in your firm. For example, if you want to make $50/hr and your break-even multiplier is 1.8 then you need to be charging every hour you bill at ($50/hr x 1.8) = $90/hr.
One thing to keep in mind is that this multiplier is only as good as your estimating and negotiating skills. The better lease you can negotiate for your office, the lower the multiplier will be. The more time you take into figuring out exactly how much computer software you need and the associated costs, the more accurate your multiplier will be. In short, garbage in is garbage out. Take the time to do it right.
QUICK NOTE: The break-even analysis needs to be something you take time and do each year. It is not something you merely copy and alter by percentage from one year to the next. If you do that, your competition will capitalize on it. Trust me on this. Someone out there is always looking to find a way to do it one percent better than you. Don’t let them find it here on something so incredibly easy. Start from scratch each year with what you think are your expenses will be (not looking at the previous year). When completed you can go back and see what you’ve missed and then determine if it needs to be put in the current year’s business plan.
Now that we have the groundwork laid, let’s talk about what you need to consider when creating your rate table. Some of the main components are as follows:
Employee Level Hourly Rate
I will breakdown these five components into further detail, but keep in mind the overall theme of your rate sheet should be simplicity. If it looks complicated, people will assume that it is. If it looks flashy, people will assume you’re trying to pull something past them. Make it clean and simple. This will not only help your clients digest it, but it will help with your accounting and bookkeeping. With that in mind, let’s look into these components in greater detail.
1. Employee Level Hourly Rate
Based on the information you created in your compensation plan, you should now be able to derive your break-even multiplier. Once completed you will simply take each professional level and multiply the hourly pay rate by the break-even multiplier. This dollar amount, based on each level’s anticipated utilization rate, is what you will need to bill each employee out at in order to keep the doors open and the lights on.
There are two basic ways to determine your profit rates. The first is to simply take the break-even rate you calculated previously and multiply it by the pre-tax margin (PTM) multiplier that you want to make. For instance, let’s say that you want to make 10% profit on that $90/hr break-even rate we calculated earlier. Simply take $90/hr x 1.1 =$99/hr. It’s that simple. The second option is a little more involved and truly isn’t something that can be applied across the board. This option is known as the value of work method. Here you are pricing your time based on what is accepted in the industry or market in which you want to compete. As I have mentioned several times throughout this series, you do not want to be competing with other one-person operations. Set a reasonable and fair price for your time and you will most likely bypass all of the clients who don’t have respect for your services. Now – to be clear – I’m not advocating that a one or two person firm charge the same rates as an 80 person firm. Clients will want to see some distinct advantage of giving you the opportunity over your competitor, so you will need to be sure and provide them with one.
2. Printing Costs
If you are just starting out, I recommend handling all of your large format printing out of office. You don’t get a special award for starting a firm with a plotter. The only thing you get is higher overhead. Keeping things simple as a direct pass-through cost is the way to go for folks just starting out. I recommend charging the pass-through cost, plus 10%, plus labor, for printing services outside of your walls. You are not a bank and the client needs to understand that. By sending printing to a service, you are taking risk by having someone bill and invoice you. You could (and most likely will) pay the invoice prior to the client paying you for the reimbursable cost. Therefore it is absolutely reasonable to charge for 10% plus labor.
If you choose to keep printing in-house then you will need to determine how much it costs you to print, and then mark that cost/sheet size accordingly. This is a fairly straight-forward task. Your printer cartridges have a life cycle on them (i.e. X sheets/cartridge). I would recommend taking that life cycle and reducing it by 25% in your calculations. If you have a small format ink printer I would include the cost of buying a new one annually in your business plan. If you have a small format laser printer I would consider getting a new one every two years. Another alternative would be purchasing or leasing a multi-purpose printer. At my firm we have had a lot of success with brands like Konica-Minolta for our small format and Kip for our large format. If you go this route, calculating your costs is very straight-forward, because you get charged per print and can simply tack on your 10% plus labor to what you are being charged.
3. Travel Costs
This should simply be cost, plus 10%, plus labor. If you buy an airplane ticket, charge the cost of the ticket plus 10%. If you need to leave on a Sunday night, then the meter starts running when you are doing things directly related to the project that you would not be doing if you didn’t have the project.
4. Mileage Costs
Mileage costs should be the GSA reimbursement rate plus 10%. At the time of writing this article the GSA rate is $0.54/mile, which means your client would be charged $0.54 x 1.1 = $0.59/mile. As stated before, you are not a bank. Your employees’ expense checks need to be paid regardless of whether your client has paid their bill or not.
5. Reimbursable Markup
Okay, now I sound like a broken record, but you should have a statement on your rate sheet that stipulates anything outside of items directly included in the base scope of services shall be reimbursed at cost, plus 10%, plus labor. This covers items stretching from permitting to sub-consultants.
1. In order to prepare rate tables, you need to read Aaron Mitchell’s article titled Overhead, Profit, and Everything In Between: Part 3, so you can determine your beak-even multiplier.
2. When it comes to starting a business, keep large format printing as a pass-through cost to the client plus 10% and labor. No need for more overhead.
3. Keep your rate sheet clean and simple. No big designs or hard to read font. The more up-front and to the point, the better.
UP NEXT >> Part 9: Liability Insurance for Your A/E Firm
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