Formula
How to calculate an agency employee's hourly cost
The number behind every price and every margin.
The fully loaded hourly cost of an agency employee is their direct monthly cost divided by their productive hours, plus the company's overhead rate per hour. It is the base for pricing a service and for measuring client profitability.
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Definition
What is fully loaded hourly cost?
Fully loaded hourly cost is what one hour of an employee's work costs the agency once salary, benefits, employer costs and a share of company overhead are included.
The formula
The formula in three lines
- 1Direct monthly cost = salary + benefits + employer insurance + bonuses + employee-specific expenses
- 2Overhead hourly rate = total monthly overhead ÷ total company productive hours
- 3Fully loaded hourly cost = direct monthly cost ÷ employee productive hours + overhead hourly rate
Example
A worked example
The figures below are illustrative. They are not customer data, and they work in any currency.
| Input | Value |
|---|---|
| Designer's direct monthly cost | 30,000 |
| Designer's productive hours this month | 160 |
| Company monthly overhead | 120,000 |
| Company productive hours (15 people × 160) | 2,400 |
- Overhead hourly rate = 120,000 ÷ 2,400 = 50
- Direct hourly cost = 30,000 ÷ 160 = 187.5
- Fully loaded hourly cost = 187.5 + 50 = 237.5
If the designer spends 25% of the month on one client, that is 40 hours, or 9,500 of labor cost for that client.
Next step
From hourly cost to client margin
Add the same figure for everyone who worked on the client. Then subtract it, with the client's direct costs, from the client's revenue:
Client contribution margin = recognized client revenue − client labor cost − freelancers − production − transportation − client tools − other direct client costs
Mistakes
Three common mistakes
- Using calendar hours. Divide by productive hours: the work schedule minus weekends and public holidays.
- Leaving out the owner. If the owner works in operations, the owner's salary is a cost.
- Ignoring overhead. Rent, software and non-billable roles are paid for by client work.
In the product
How Agency Root does this for you
Agency Root calculates fully loaded employee cost and overhead allocation every month, and uses them to show client profitability. Cost changes are effective-dated, so closed months do not change. Included in Agency Growth and Agency Scale.
Questions
Common question
What counts as productive hours?
The hours in the employee's work schedule, minus weekends and public holidays.