Last updated November 6, 2026
General information, not tax or legal advice. The rules depend on your country and your situation, so check anything with a tax or legal consequence with your accountant.
To calculate a charge-out rate, add a person's yearly pay and on-costs to their share of overheads, divide by the hours they can realistically bill in a year, then add your profit margin. Someone costing €84,000 a year with 1,144 billable hours breaks even at about €73 an hour.
What is the charge-out rate formula?
The charge-out rate formula is yearly cost, divided by billable hours, divided by one minus your target margin:
Rate = (pay + on-costs + overhead share) ÷ billable hours ÷ (1 − target margin)
The first two steps give you the cost rate, the point at which an hour breaks even. The last step adds the profit. Each part is worked through below.
How many billable hours does one person have in a year?
One person has far fewer billable hours than a 40-hour week suggests. Here's an invented example, and you should replace every figure with your own:
| Step | Hours |
|---|---|
| 52 weeks at 40 hours | 2,080 |
| Less 25 days of holiday | −200 |
| Less 8 public holidays | −64 |
| Less 7 days of sickness and training | −56 |
| Available hours | 1,760 |
| Billable at 65% | 1,144 |
Holiday and public holiday counts vary by country. The 65% is the figure to be honest about. It should come from your own records, which is one reason to track billable and non-billable hours separately. The guide to utilisation versus billable hours goes further into that measure.
What goes into the cost of an employee?
The cost of an employee is their pay, plus on-costs, plus a share of your overheads.
- On-costs are what you pay on top of salary: employer payroll taxes and social contributions, pension, insurance and benefits. These differ widely between countries, so take them from your payroll figures.
- Overheads are everything that keeps the doors open: rent, software, insurance, your accountant, vehicles, admin staff, and the pay of any owner who doesn't bill.
The simplest way to share overheads is equally among the people who bill. Overheads of €240,000 across 10 billable staff is €24,000 each.
A worked example: one senior consultant
Here's the invented example carried through, for a senior consultant on a €48,000 salary with on-costs at 25%.
| Item | Amount |
|---|---|
| Salary | €48,000 |
| On-costs at 25% | €12,000 |
| Overhead share | €24,000 |
| Yearly cost | €84,000 |
| Billable hours | 1,144 |
| Cost rate (€84,000 ÷ 1,144) | €73.43 |
| Rate for a 20% margin (€73.43 ÷ 0.80) | €91.78 |
| Charge-out rate, rounded up | €95 |
At €95 an hour, the margin is (€95.00 − €73.43) ÷ €95.00 = 22.7%, provided the person really does bill those 1,144 hours.
Margin or mark-up: the mistake that costs thousands
Adding 20% to your cost doesn't give you a 20% margin. €73.43 plus 20% is €88.12, and the profit of €14.69 is only 16.7% of that price.
Over a year, the difference is real money. For this one person, a 20% margin needs €105,000 of billings (€84,000 ÷ 0.80), and a 20% mark-up brings in €100,800 (€84,000 × 1.20). That's €4,200 a year, on one person, from a slip in the arithmetic. Divide by 0.80. Don't multiply by 1.20.
What happens to the rate if billable hours change?
The rate moves sharply with the billable share, because the same cost is spread over more or fewer hours. These figures use the same €84,000 and 1,760 available hours.
| Billable share | Billable hours | Cost rate | Rate for a 20% margin |
|---|---|---|---|
| 55% | 968 | €86.78 | €108.47 |
| 65% | 1,144 | €73.43 | €91.78 |
| 75% | 1,320 | €63.64 | €79.55 |
This is why a rate built on a hopeful billable share can look competitive and still lose money. Priced at €80 on a 75% assumption, this person loses money for every year they actually bill 55%, since their real cost rate is €86.78.
Should different staff have different rates?
Yes, because both the cost and the billable share differ by grade. Here's the same method across an invented team, with the same overhead share and on-costs.
| Grade | Salary | Yearly cost | Billable hours | Cost rate | 20% margin | Charge-out |
|---|---|---|---|---|---|---|
| Junior | €34,000 | €66,500 | 1,320 (75%) | €50.38 | €62.97 | €65 |
| Senior | €48,000 | €84,000 | 1,144 (65%) | €73.43 | €91.78 | €95 |
| Director | €72,000 | €114,000 | 880 (50%) | €129.55 | €161.93 | €165 |
The director's rate is high as much because of the 880 hours as because of the salary. If you'd rather quote one figure for the whole team, the guide to the blended hourly rate shows how to get there from this table.
Does the three-times-salary rule work?
The three-times rule works as a quick sanity check and not as a method. It prices an hour at three times the hourly wage: a third for pay, a third for overheads, a third for profit.
For this senior consultant, €48,000 ÷ 2,080 hours is €23.08, and three times that is €69.23. That's below the €73.43 cost rate, so the rule would have priced every hour at a loss. It can't see your overheads or your billable share, and those are what decide the answer.
What if the market won't pay that rate?
The calculation gives you a floor, and your market sets the ceiling. If clients won't pay the floor, the arithmetic leaves you with a few levers: raise the billable share, cut overheads, hand more of the work to a lower grade, or sell the work as a fixed fee instead of by the hour.
If the market would pay more than your calculated rate, charge more. Your costs don't set your value. The guide to the rate increase letter covers how to tell existing clients.
Using charge-out rates in ERPFlow
ERPFlow doesn't calculate charge-out rates. It has no rates on staff or projects, no utilisation reports and no per-person time reports, and ERPFlow doesn't have a timer or timesheets today. Time tracking, including converting tracked time into invoices, is coming soon.
The inputs are there, though. Staff records hold each person's salary history, behind the Salaries permission. Expenses give you period totals in your base currency, including This year, and the dashboard shows salaries and profitability to people allowed to see them. The billable share has to come from your own records.
Put the result into services, one per grade. Unit price holds the charge-out rate, and Cost price can hold the cost rate, which customers never see. Each service then fills in its price on quotes and invoices, and a rate rise means changing one record. That cost price isn't a per-job margin, because expenses aren't linked to customers or jobs.