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When we started our business nearly 20 years ago, we'd both worked in other studios, so, like many other start-up studios, we just carried over many of their practices. It took us a few years to stop and take a close look at our pricing and expenses, but only a few minutes to realise we could work out a more accurate hourly rate.

Since then, our studio has maintained a stable, high level of profitability.

Historically, we have always charged ourselves out on an hourly basis. If we think a project will take 15 hours to design, we estimate 15 x our hourly rate. This makes it imperative that our hourly rate isn't plucked out of thin air; it must cover our fixed costs + wages + a profit margin.

Fixed costs and wages are called expenses. These are non-job related costs that must be paid regardless of how much work is produced. They include things like equipment leases, car expenses (including parking), internet connection (including download/upload costs), fax and photocopier paper, rent, accounting and advertising costs. It's also important to remember that wages include salary + tax + superannuation + workcover insurance costs.

The amount of profit margin you want is determined by past experience and the market. A suggested benchmark is 20%.

One way to ascertain an hourly rate is to add your fixed costs of (say) $5,000 per month with the wages bill of (say) $5,000 per month with a profit rate of (say) 20% i.e. $2,000 per month.

$5,000 + $5,000 + $2,000 = $12,000 per month or $144,000 per year.

Next, it's safe to assume you will work 48 weeks (240 working days) per year, less public holidays. The number of public holidays will vary from state to state, but, on average we work about 234 working days. Multiply that by 8 hours per day = 1872 billable hours per person per year.

That means your hourly rate is $144,000/1872 = $77 per hour.

You might think that's great because you're charging $100.00 per hour.

Wrong.

The $77 per hour assumes that you can charge yourself out for 8 hours of every working day of the year.

What about time for new business, or administration duties?

A more realistic figure is to work on 6 hours billable per day, making your total billable hours 1,404 per year

With fixed costs and profit of $144,000 per year your hourly rate is $144,000/1404 = $102 per hour.

To make the hourly rate even more accurate, you must identify all possible chargeable time and the items you purchase on behalf of your clients. One example is travelling time to and from client meetings. If you don't want to charge it, but find you are spending 1 hour a day on the road, then you need to revisit your overheads formula and work on 5 hours billable per day, equalling 1170 hours per year. That will change your hourly rate to $123.

We have found by rigid examination of the hours we work, the tasks we do and the cost of running the business, we are able to sustain good, reliable profits.

Copyright Greg Branson, 2003

This is an extract from dmzine.com

Dmzine.com is a subscription based web site that helps design studio owners build their businesses. Based on twenty years of experience managing a design studio, the authors Carol Mackay and Greg Branson of Mackay Branson design, have produced dmzine.com to share all their design management techniques.

See more at http://www.dmzine.com

"I would agrue $123p/hr is reasonable. Yes, we are in tough times. And yes most small client would shy away with that price tag. But it all comes down to the design industry to stand up and stick together. I don't seriously see other professional industries undercut themselves as hard as we do. Plumbers are better business people that us. Seriously."

"I've only got to look at the agencies we use and the rates being charged. AU$123 is quite low in comparison. Also, different areas of design often get billed at different rates. Image scanning and manipulation differs to copywriting and strategy development.

Alas, it's a smart way to go about determining a costing, and also highlights the (quite obvious) benefits of keeping overheads down."

"I'm not sure if Greg has been aware of our recent industry decline and it's continuing turbulence, but the practicality of currently charging $123.00 per hour anywhere for design services would realistically land him at the unemployment office. Calculating and charging your desired rate is one thing, but having it honoured and respected is something else. Perhaps we need an article on "How to Cost Realistically During Tough Times"."