Many tradies encounter problems in setting charge out rates for their businesses. It’s dangerous for a tradie to be setting their charge out rates if all they’re doing is copying what a competitor is charging. How do they know whether the competitor is utilising charge out rates that will achieve a reasonable profit for their business? What correlation does their business investment and costs have to a competitor’s business? Probably very little!
It’s also dangerous to set charge out rates at a certain level and to leave those charge out rates at that same level for many years. Even in this period of very low interest rates, costs are still increasing.
One of the key activities that accountants can perform for tradies is to assist a tradie client in setting charge out rates for the forthcoming 12 months and to then monitor the business’ financial performance and analyse the business’ costs and labour productivity figures, to determine whether the charge out rates have been set at rates which are going to assist a business to achieve its profit target.
ESS BIZTOOLS has developed a “Tradie’s Charge Out Rate Calculator” which assists in setting realistic charge out rates to earn the business’ targeted profit for the year.
The first area to tackle is the labour on-costs.
Once the on-costs have been sorted out the labour budget can then be calculated. This incorporates the gross salary payable to a team member, the labour on-costs applicable to that team member and the productivity percentage that is being budgeted for each individual team member, including working owners.
An overhead expense budget for the 12 months period should be prepared.
The income estimated to be produced from charging a mark-up on purchases that the business is going to pay for which are then going to be installed for the benefit of a customer can then be determined. This is normally a percentage that will be utilised on the costs of products purchased for the benefit of a customer. The charge for a mark-up on products purchased for customers is to cover the time and effort taken to secure those purchases on behalf of customers, together with the financial cost involved in purchasing and paying for these items.
The business operators should be asked to indicate the desired profit (not including working owner’s salary) that they would like to earn from the business.
The key information to be entered into the Tradie’s Charge Out Rate Calculator includes:
- Total labour cost including labour on-costs.
- Hours worked and targeted productivity of team members and working owner(s).
- Overhead expenses for the 12 month period.
- Targeted net profit for the business.
- Materials mark-up percentage.
- The estimate of materials to be purchased for installation into a client project.
Based on the individual working hours and productivity percentages that have been used, calculations are then made to determine the appropriate charge out rates for each team member and working owner.
A proof summary is then prepared to show that, if the individual team members and the working owner achieve the working hours and productivity percentages that have been agreed to, that the business has controlled its overheads and that the mark-up on material purchases is similar to what has been budgeted, the business can achieve its targeted profit for the year.
It’s a good idea to have a meeting with your client at least four times per annum to monitor the combination of working hours, productivity, wages costs, mark-up on material purchases for customers, level of purchases being made for customers, overhead costs to see whether the charge out rates are still affective to achieve the targeted profitability for the tradie’s business.
This is not an exercise to be carried out once a year. Our recommendation is that the initial process is carried out at the beginning of the year and that a review process is implemented for either a monthly or quarterly review to determine whether the charge out rates are effectively generating the level of profits that have been targeted. If not, the base information included in the calculations should be revisited and adjustments made to the inputted figures to determine a new level of charge out rates to be utilised.
Please contact YBM if you would like to discuss this further.