How to Set Your Hourly Rate (Architects Interior Designers)

so how do you decide how much to charge for your design services it's common question you could do it like I did when I first started freelancing and ask your friends you can make a guess at it I chose forty five dollars an hour for no particular reason but what I found out was that forty five dollars an hour once you take out taxes and the computer and software and office supplies ends up being a lot less than forty five dollars so I'm gonna show you the right way to do it today there's two versions

there's a simplified version and there's a more complicated version so the spreadsheet comes bundled with my startup toolkit if you want to go ahead and pick that up it comes with a whole host of resources that'll help you get started with your design business if you want to pick it up separately it's available separately - alright let's get into it [Music] the simple one is really designed if you're a freelancer you're someone who is working on nights and weekends someone who's transitioning from working for someone else to working on their own this is a good

one to use just to set a baseline on the spreadsheet you'll note these cells which have a sort of yellowish orange color to them those are the cells that you're going to be filling in those are the only cells that really require information inputs from you first thing you need to do is come up with your desired income and we're just gonna call that $100,000 and then you need to divide that by a monthly figure and we're gonna use ten months here and why 10 months 10 months assumes you're gonna take about a month for

vacation four weeks vacation and then you're gonna have a month allocated to things that aren't billable things like invoicing accounting things you can't directly Bill for it so that comes up with a target income here of ten thousand dollars per month and then from there you have two choices you can either set the number of hours that you want to work per week let's say you have a really busy schedule and you're doing this in the evenings and you can only dedicate 10 hours per week to working on this so we input 10 here we

come up with a billing rate that way now that spits out in this particular instance 250 dollars per hour and you have to ask yourself is what I'm doing equivalent to a 250 dollar an hour billing rate and if you don't have an office you don't have a lot of overhead convincing a client that a 250 dollar per hour billing rate may be a little tricky so here's where you may have to shift into the other spreadsheet and we'll get to that in a minute second option you have here is to set a billing rate

so you determine well 250 is now a little bit high for what I'm doing I don't have an office I don't have all this overhead so maybe I'll set it at 65 dollars an hour now what this does is just looks at the desired annual income that you put into the first cell and it does the math for you when it comes up with 38 targeted billable hours per week to work based on 154 hours per month now you may look at that and say wow that is actually a lot more hours than I have

time to dedicate this to this so you may need to adjust your billing rate accordingly and you can use yours this spreadsheet to do that this simplistic view of an hourly billing rate is not going to give you all the information you probably need and that's why we have the break-even analysis that's the more complex sheet we're gonna move on to that next so I promise this isn't as intimidating or complex as it might look initially the orange yellow cells are the ones you need to fill in again and we're gonna start right in the

upper left hand corner I am a sole proprietor myself so it's just me as the principal I have no other staff members if you have other staff members architects admin staff you can add them here the proper way to do that is to click on the row and click insert and that preserves the functions and the formulas that are already working in this chart so don't go ahead and modify cells if you don't know what they're doing it's all set up to work for you once you input information into the yellow orange cells so as

a principal or the first column we're gonna encounter is this utilization rate and all that means is the percentage of time that you're working that is actually billable so as a principal of my business I'm not able to build for every hour that I actually work in here because I'm trying to drum up new work I'm working on advertising on maintaining the website I'm answering phone calls all the things that are not directly available to a client so my utilization rate is about 50% the range for principle goes between 50 and probably 65% your mileage

may vary that's just a good guideline to use for people like architects other staff members interns maybe you can expect that utilization rate to be 80 maybe even as high as 90 percent not every hour that someone works in an office is going to be billable so there needs to be some accounting for that here I've used 85% you can see that the next column over 2080 annual hours that's taking 52 weeks in a year and multiplying it by 40 hours per week this spreadsheet does not capture any overtime hours that's not what this is

designed for the next column is the salary expense and this again is where you have to input whatever numbers you're looking for if it's $150,000 that's what it that's what it is so if you have employees and you know what these numbers are great if you want to just make a guess for yourself you may just have to do that even if it's just you in the business you need to be paying yourself a salary this is the way to capture the true health of a business you are taking a salary because you have to

support your family you need to put food on the table you need to pay your rent now from here we come up with this column column F shows the hourly average and that just takes the salary expense and divides it by the annual hours the spreadsheet allocates direct labor expenses and indirect labor expenses according to the utilization rate so the higher the utilization rate the more the door is attributable to direct labor costs you don't have to worry about this yet but it will come into play as we get to and looking at the overhead

rate down below we're gonna leave these things for later we're gonna come down to this zone the office and operating expenses if you filed taxes before you probably have some idea what these are these are things like rent cellphone utilities insurance costs licensing fees these are all expenses directly attributable to keeping the lights on in your business now if you haven't filed your taxes yet and you're just getting started in this you can make some educated guesses on what your internet might cost what your rents might cost software things like that fill those in with

as much information as you possibly know or can can tell if you don't know it really have no way of guessing what they are I gave a guideline in the spreadsheet that should help you determine that as a percentage of your labor costs okay but try and use some estimated figures if you possibly can once you input information into here you'll see that the numbers update automatically in the spreadsheet these are not totals from my actual business I'm just using some working figures in here from there we need to also figure out payroll taxes and

benefits and again if you don't know what those are you haven't paid taxes before I'll give you a guideline in the spreadsheet to help you figure out what that is from there we're going to total the operating expenses all the way through our indirect and direct labor expenses payroll taxes and benefits and we're going to come up with this number which is the break-even cost so the break-even costs means you're paying all of your employees and you're paying all your bills to keep the office open and running but you're not making any profit and that's

not good because we want to make profit so we're going to move down here to this cell this is the celery input your desired profit margin here and that's gonna do all the math for you basically you're going to take your breakeven cost and you're going to divide that by the compliment of the desired profit margin so a word of caution here don't make this mistake I don't want you to take 20 percent if that's your desired profit margin and multiply your break-even cost by that number what that will do is a result in this

number now I've done this just as an example so you can see what doing that means if you take your breakeven cost and you multiply it by 0.2 you come up with fifty four thousand two hundred fifty as the profit and desired profit and if you add that to your breakeven cost and you do the math again you actually result that actually results in a seventeen percent profit margin and I have seen this mistake made other places online if you're going around about this trying to figure out about multipliers and profit margins so don't make

that mistake if you use this spreadsheet it does all the math for you so we come up with our profit margin from there we're gonna be able to determine our overhead rate and our break-even rate okay now these things are you've probably heard of overhead rates before the overhead rate is basically the how lean your business is so the lower that number is the more lean it is the less overhead costs you have so when you trim your office expenses this number goes down the higher it gets the more expensive it is to operate your

office so whether that's through employees indirect labor costs or you know travel expenses or whatever it might be you want to keep an eye on it's important to know what this number is and you can see that that number is directly related to the break-even rate so the break-even rate you can kind of think of like this for every dollar we're gonna pay somebody in a salary expense we need to earn that dollar back plus we need to earn another dollar in 38 cents in this particular spreadsheet to just to break even right now we

don't want to break even we want to make a profit and we're going to talk about that next in our columns over here net multiplier is the last thing we're going to talk about and this just basically is a number which represents every dollar that's spent in direct salary expense results in three dollars two dollars and 98 cents technically here net operating revenue okay now the relationship between the net multiplier and the break-even rate you want the net multiplier to always be higher than the break-even rate right you that means you're making money if the

net multiplier is lower than the break-even rate it means you're losing money so there is a correlation between all these numbers so knowing all this what does that mean what do we do with it well we come up here to the break-even cost the break-even cost shows for this particular person and that's me principal making $100,000 a year in salary expense to break-even and pay all the bills and keep the lights on I need to be billing out at a hundred and fifteen dollars per hour and I need to be working at this utilization rate

so half my billable hours 1040 hours in this year I need to be billing out at $115 an hour but we've already determined we don't want to just break even we want to make a profit so when we enter our profit percentage here that spits out this number which is 143 so to earn 20% profit on top of our breakeven costs I need to be billing out at 143 dollars per hour same thing goes here with the other staff members and if you have admin staff members you can add them in here so what does

this mean well I'm not going to come and bill out 143 dollars I'm probably gonna round up to 150 dollars so that's where this number comes from same thing with this 107 I'm gonna bill out at 125 dollars an hour this produces a projected revenue figure and that gets plugged in right down here and then you can see based on those actual numbers we come up with a projected profit of this amount and that is an actual profit margin of 28 percent so you can see what we did when we round it up over here

for our billing rate which we set with the baked-in profit we actually ended up making a little bit more than 20% okay so what are some ways that you can increase the profit margin well we're number one we can come over here and we can just say well I want to make 40% as a profit margin so doing that that gives us our it doesn't change our breakeven cost it changes our hourly rate with profit to 191 in this case and 143 in this case so we'd have to come over into this zone and make

this $200 and make this one 150 and you can see that bumps up our projected revenue here and as we come down to our projected profit margin because it's a little bit over what we're what we're calling for here in the baked in profit you can see we've made a little bit more okay so that's one way of doing that let's just go back another way of doing this is to say I'm gonna be more efficient you know my utilization rates gonna go up 65% there and you can see what that does that adds straight

revenue to the bottom line and you can see our profit margin has gone up here ok so what's another way we can do that well another way that I'm a big fan of is by adding other products and particularly passive products so passive products add dollar-for-dollar that increase your profit margin every dollar you make in passive income is a dollar you get to keep in profit so I'm a huge fan of these and I've just filled these in with some random numbers anything is possible in this category I just want to say that and the

quite a bit more than what I'm projecting here is easily doable if you take some time and invest in it and I would say don't worry about doing all of it pick one thing invest in that really spend some time there of course with passive products there will be an indirect labor cost associated with it you can account for that in this spreadsheet your utilization may go down initially but over time this is going to pay you back in in a really big way and if we just use these as guideline numbers you can see

what it does to the projected profit margin I've just shown it here as the Delta if we add in those profits because there are no overhead expenses taken out of that if you do the passive income thing correctly there's very little expense associated with it so you can see by doing this amount of added projected revenue we've increased our profit margin by 10 percent you can use it to track your efficiency rates as well so let's just say our professional staff member number one here is actually only working tracking at seventy five percent utilization rate

well you can see what changing that number does the ripple effect that it has he it changes the projected revenue and it changes the projected profit margin so it's good reason to have some cushioning built into this whole system so you can account for those kinds of inconsistencies so there's some optimal targets between some relationships between these figures that can you can use as a guideline every individual business is going to be different but generally if you're a direct labor as a percentage of net operating revenue is about 30% you're probably in pretty good shape

now your overhead let's say your overhead is getting up over 50% and that's gonna happen if your utilization rate on some of your employees you know starts to drop because your indirect labor costs are starting to rise right so therefore your overhead is is starting to rise you can start to look at some of these numbers as the percentages and see how they're tracking against your estimates and you can see okay is my business healthy also you know we're looking at a profit as a minimum of 20 percent knowing your numbers like this even though

this may seem very detailed knowing some of these basic figures helps build confidence in you it makes it easier for you to talk about with your client and they in turn will actually be more confident in your ability to execute on the project and do it well if they know you care about your numbers they're going to be confident that you're caring about their numbers as well they don't talk about this in architecture school but it's a really important part of running a profitable sustainable practice you won't be able to build your architecture if you

can't figure out a proper billing rate to keep the lights on to pay your employees to make sure you're able to buy office supplies all the things that it takes to build architecture this is a big part of it so I hope it was helpful we'll see you again next time Cheers my friends you now another way to make more money here is just to do this half a million bucks there you go just have to increase your billing rate Wow why haven't I done that