Calculating Your Hourly Rate as a Consultancy
Most consultancies set their hourly rate by feel, with one eye on what the neighbours charge. That works until the year you close with a full calendar and a thin profit, and nobody can explain where it went wrong. This article gives the calculation model, works it through with concrete numbers, and shows which lever pulls hardest on your rate. Spoiler: it is not the rate itself.
The model in four steps
A defensible hourly rate is built in four steps, in this order:
- Determine how many hours per employee you can genuinely sell.
- Calculate the fully loaded cost per employee per year.
- Divide cost by billable hours: that is your cost per billable hour.
- Add your target margin and check the result against the market.
The biggest mistake is almost always in step 1. Anyone assuming 1,600 or 1,800 billable hours per FTE is structurally underpricing.
Step 1: billable hours, realistically
Start from gross hours and subtract everything that never gets sold.
| Item | Hours |
|---|---|
| 52 weeks × 40 hours | 2,080 |
| Public holidays (7 days) | -56 |
| Annual leave (25 days) | -200 |
| Sickness (4%) | -74 |
| Net hours present | 1,750 |
| Utilisation 70% | × 0.70 |
| Billable hours | 1,225 |
That last step is where it hurts. Of the 1,750 hours someone is present, a share goes to business development, internal meetings, knowledge building, writing proposals and administration. For a consultant in a firm with its own sales and internal duties, 65 to 75% is a realistic band. Above 80% you are approaching a staffing model where the consultant sits with the client permanently.
If you do not know your own percentage, that is the first thing to measure before touching rates. What it takes to get that number reliable is covered in increasing billable utilisation; the basis is time tracking that also captures non-billable time, because without a denominator every percentage is a guess.
Step 2: fully loaded cost per employee
Do not calculate with gross salary, but with everything an employee costs annually, including their share of overhead.
| Item | Amount |
|---|---|
| Gross salary | €60,000 |
| Holiday allowance (8%) | €4,800 |
| Employer contributions (social security, pension, insurance, roughly 23%) | €14,900 |
| Labour cost | €79,700 |
| Overhead per FTE (premises, software, management, sales, admin, training) | €25,000 |
| Total cost per FTE | €104,700 |
That overhead figure is the item most often underestimated. Take your total operating costs, subtract the direct labour costs of billable staff, and divide the rest by the number of billable FTEs. That gives you a number that holds rather than an assumption. For firms between 10 and 50 people it typically lands between €20,000 and €35,000 per billable FTE.
Step 3: cost per billable hour
€104,700 divided by 1,225 billable hours = €85.47 per billable hour.
This is your break-even point. Every hour sold below this costs you money, even when it feels like "we are paying them anyway".
Step 4: add margin, then check
Margin is calculated on revenue, not as a markup on cost. The difference is bigger than people expect: a 20% markup on €85.47 gives €102.56, which is a real margin of 16.7%. If you want an actual 20% margin, divide by 0.8.
| Target margin | Calculation | Hourly rate |
|---|---|---|
| 10% | 85.47 / 0.90 | €94.97 |
| 15% | 85.47 / 0.85 | €100.55 |
| 20% | 85.47 / 0.80 | €106.84 |
| 25% | 85.47 / 0.75 | €113.96 |
For this example, a rate of €105 to €110 excluding VAT delivers a healthy margin of around 20%. Then check it against what your market pays. If your calculated rate sits well above the market, the answer is almost never "accept less margin"; the problem is in step 1 or step 2.
The sensitivity that matters most
This is the point that makes the model worth building. Hold all costs constant and lower utilisation from 70% to 60%:
- Billable hours: 1,750 × 0.60 = 1,050
- Cost per hour: €104,700 / 1,050 = €99.71
- Rate at 15% margin: €117.31
Ten percentage points of utilisation shift your required rate by nearly 17%. No rate negotiation delivers what ten points of utilisation does. And in reverse: a firm that raises its rate by 5% while utilisation drops five points ends up worse off.
That is why the number you want to see weekly is not your rate but your utilisation. Which eight numbers belong alongside it is covered in agency KPIs.
List rate versus realised rate
Your calculated rate is what you need. What you get is something else. Three leaks sit in between:
- Discount at proposal stage. A framework agreement with a 10% volume discount takes €107 back to €96.30.
- Hours you do not invoice. Work that "came with it", variations nobody dared raise. See invoicing out-of-scope work.
- Fixed price that overruns. On a fixed fee, your realised rate is simply the invoiced amount divided by the hours tracked. If the project overruns by 20%, your rate drops by 17%.
So always measure your realised rate: invoiced amount divided by tracked hours, per project and per employee. That number is more honest than your price list. In the Horixa Insights dashboard it sits next to your utilisation and your work in progress, so the gap between what you charge and what you keep stops being an annual surprise.
Differentiating rates
A single rate for everyone is administratively calm and commercially expensive. Two axes are worth the effort:
By seniority. A junior with €45,000 of labour cost and the same overhead lands at roughly €63 per billable hour; a partner at €110,000 lands above €135. One average rate means your juniors are too expensive to sell and your seniors structurally too cheap.
By type of work. Rush work, work outside office hours and work requiring a scarce specialism may carry their own rate. In practice you handle that with rate agreements per hour type, so the employee only picks the right type and the rate follows automatically.
Frequently asked questions
How many billable hours per year are realistic? With 25 days of leave, 7 public holidays and 4% sickness, about 1,750 hours of presence remain. At 70% utilisation that is 1,225 billable hours per FTE per year. Assuming 1,600 or more only works in a staffing model.
How do I calculate my hourly rate? Divide your fully loaded cost per employee per year (labour cost plus overhead) by the number of billable hours, then divide that result by 1 minus your target margin. In the example: €104,700 / 1,225 = €85.47, divided by 0.80 gives €106.84 at a 20% margin.
What is a normal overhead per FTE? For consultancies between 10 and 50 people, overhead typically runs between €20,000 and €35,000 per billable FTE per year. Calculate it from your own accounts: total costs minus the direct labour cost of billable staff, divided by the number of billable FTEs.
Margin as a markup or as a percentage of revenue? As a percentage of revenue, because that is how it appears in your accounts. A 20% markup on cost yields only a 16.7% margin. Divide cost by (1 minus your margin percentage) to get it right.
What is the difference between list rate and realised rate? Your list rate is what you ask; your realised rate is the invoiced amount divided by the hours actually tracked. Discounts, uninvoiced hours and overrunning fixed-price projects sit in the gap. Steer on the second number.
Should I raise my rate every year? Labour costs rise with wage agreements and inflation, so a flat rate means a shrinking margin. Rerun the model annually with your current labour costs, overhead and measured utilisation, and adjust based on that outcome rather than on a round percentage.
Want to see utilisation and realised rate per employee instead of estimating them? Try Horixa free for 14 days, including the Insights dashboard.