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Time and money · 5.5

Rate cards and the blended figure

Rate cards and the blended figure. What decides it, what it costs, and what usually goes wrong. For another implementation reference, see this Monitask guide.

Three rates, frequently confusedThe vocabulary

Cost rate. What an hour of somebody's time costs you, loaded with employment costs and a share of overhead.

Bill rate. What a client pays for it.

Effective rate. What you actually realised: revenue divided by hours worked, including the hours you did not bill. For broader background, see Rippling.

The third is the one that tells you anything and the one least often calculated, because it requires recording the unbilled hours the previous entry is about.

Blended against role rates

A blended rate is simple to quote and it conceals the mix. Two engagements at the same blended rate can have entirely different margins because one used senior people for work the other did with juniors.

Role rates expose the mix and invite a client to question who is doing the work, which is sometimes an uncomfortable conversation and is generally a healthier one.

Whichever you quote, analyse internally by role. A business that cannot see its mix cannot explain a margin change.

The rate that has not moved

Rates set three years ago against costs that have risen since. Extremely common, because raising a rate requires a conversation and letting it stand requires nothing.

The effective rate calculation makes this visible: if it has fallen while the nominal rate has not, either the mix has shifted or write-offs have grown, and both are worth knowing before somebody notices margin instead.

Discounts, and where they should sit

A discount applied to the rate disappears into the rate and is forgotten. A discount shown as a line on the invoice is visible to the client every month, which is both more honest and more useful.

It also makes the eventual conversation about removing it possible, which the buried version does not.

Changing a rate

With notice, in writing, with a reason, at a period boundary, and applied to new work rather than retroactively to a project in flight.

Annual is easier than occasional. A business that reviews rates every year has a routine; one that raises them every four years has a negotiation each time and a larger increase to justify.

What the record contributes

Everything above requires knowing hours by person, by role, by client, including the unbilled ones. Without that, rate setting is done by comparison with competitors and by instinct.

Which is how most rates are set, and it is why so many are wrong in the same direction.

A caution

Cost rates loaded with overhead depend on an allocation somebody chose, and different allocations produce different conclusions about which work is profitable.

Pick one method, document it, and keep it stable. Comparing years computed on different bases is the most common way this analysis misleads.

Cost rate, calculated properly

Salary, employment taxes, benefits, and a share of the costs of having somebody: space, equipment, software, management time, and the non-billable time that comes with any role.

Divided by realistically available hours rather than by a nominal year. A cost rate computed on two thousand hours for somebody who bills eleven hundred is wrong by a factor that invalidates every conclusion built on it.

The junior who looks profitable

Low cost rate, decent bill rate, apparently excellent margin. Then the review time from somebody senior, the rework, and the slower pace are counted, and the picture changes.

Attribute supervision and rework to the work they belong to, or the analysis systematically favours junior-heavy delivery.

Rates for different clients

Common, defensible, and worth being able to explain if a client learns of it, which occasionally happens. Base differences on something statable: volume, term, payment terms, complexity.

What to review annually

Cost rates, because they move. Bill rates against them. The effective rate against both. And the mix, because a stable rate with a shifting mix produces a margin change nobody has explained.

Where the effective rate comes from

Revenue for a period divided by all hours worked on it, including unbilled. One division, and it is the number that captures rounding, write-offs, mix and rate change in a single figure.

Track it monthly. When it moves and the nominal rates have not, one of the other three has, and the entries in this part cover which.

A short summary

Know all three rates. Analyse by role whatever you quote. Calculate cost rates on realistic available hours. Show discounts as lines rather than in the rate. Review annually. And treat the effective rate as the number that matters.

One line to carry

The nominal rate is what you quote. The effective rate is what you get, and only one of them appears in most management reporting.

A caution about benchmarking rates

Published rate surveys carry every problem the entry on benchmarks describes, with an additional one: rates are quoted before discount, and the discount is the part nobody publishes. Treat any market rate figure as an upper bound on what is actually charged.

Where to start

Compute the effective rate for last year. One division, and it is frequently a good deal lower than anybody in the business believes.

Communicating a rate rise internally

The people delivering the work hear about it from clients. Tell them first, with the reason, so that they can answer rather than discover it in a meeting.

Rates for internal work

Some businesses cost internal projects at a notional rate to make trade-offs visible. Useful, and it becomes harmful the moment the notional figure is treated as real money in a decision about somebody's team.

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