Advice On Charge Out Rates Helps Tradies!

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Welcome to this update on ESS BIZTOOLS ADVISORY SERVICES NEWS.

ADVICE ON CHARGE OUT RATES HELPS TRADIES!

Have you ever sat down and talked to your trades clients and asked them how they set their charge out rates?

If you did, was the response vague and covered things like:

• Similar to competitors
• Same as last year plus a percentage
• And other similar responses?

The key objective in setting charge out rates is to pay all the expenses and earn a targeted profit for the year.  This basically applies in every business.

Today we want to consider how a Trades Business can benefit from your assistance in determining charge out rates.

A key figure to be determined is – what is the targeted profit that the trades business operator will be satisfied with – this could be expressed as a dollar figure or it could be calculated as a percentage of the estimated value of the trades business.

Once the targeted profit has been determined we then need to examine the team.

A key component is what will be the cost of the “labour on costs”.  In our experience many Tradies over look factoring in the labour on costs when they are calculating a charge out rate.

The labour on costs include:

• Annual leave
• Holiday pay loading
• Shiftwork loading
• Statutory holidays
• Personal carers and compassionate leave
• Superannuation
• Workers’ compensation
• Training days
• Redundancy payments (if applicable)
• Long service leave
• Payroll tax (if applicable)

The aggregate of these items is the cost estimate expressed as a percentage on the team members’ remuneration to determine the cost of the labour on costs.

The Labour Budget then needs to be determined based on the cost of individual team members or classifications of team members including their working hours and the estimated productivity percentage that will be achieved by them.

When the Labour Budget is completed add the labour on costs for the total expenditure anticipated by the business for the team.

Most Tradies purchase products or components for their clients and many charge a margin on this expenditure to recoup them for the time and effort spent purchasing the products or components, paying for them and organising guarantees.

A determination needs to be made as to the estimate of expenditure to be incurred during the year on outlays on behalf of clients and the margin that is projected to be earned.  A decision then needs to be made as to whether this margin will be used to subsidise the labour charge out rate or will it be treated as a “separate profit item” within the business.

The Overhead Expense Budget for the twelve months period needs to be determined.  Normally this would be based on the previous years’ expenditure plus adjustments for current costs but it could also include some items that might not have been incurred in previous years that it is anticipated will be incurred during the next twelve months.

The quantum of the income to be earned from labour charge out can then be determined based on:

• Cost of labour and the labour on costs
• Overhead expenses for the twelve months
• Profit target for the business

If the decision has been made to utilise the “margin on purchases made on behalf of clients” as a subsidy towards the labour charge out rates this amount would be deducted.

If the decision is that the margin would be retained as a separate profit item obviously there would be no adjustment.

In the ESS BIZTOOLS’ Trades Charge Out Rate Calculator all of this information is inserted and the system calculates the appropriate charge out rates which when expressed on the estimate of productive labour for each team member, will generate the gross income that has been targeted and when the expenses including cost of labour and labour on costs are deducted the end result will be the targeted profit for the year.

If the decision was made to retain the “margin on purchases made on behalf of clients” this amount would be added to determine the overall targeted profit for the year.

Accountants offering this type of service normally offer a full twelve months’ accounting service relating to the calculation of the actual labour productivity percentage each month and comparing that to the original calculation to determine whether any adjustments are needed in the charge out rates.

The monthly Profit and Loss Account is prepared and analysed so that if any adjustments are needed they can be implemented.

The ESS BIZTOOLS’ Trades Charge Out Rate Calculator is incorporated in all ESS BIZTOOLS’ Product Packages from the Advisory Intro Package upwards.

In recognition of the issues confronting SMEs, as well as Accountants and Bookkeepers, ESS BIZTOOLS is offering a special discount on our four product packages until 16 September 2024.  You can find details of the significant discounts at www.essbiztools.com.au – click on Packaging and Pricing.

If you would like a one-on-one complimentary review Zoom meeting with our Founder and Managing Director, Peter Towers please send us an email: