When you track billable hours, understanding the difference between bill and pay rates can significantly affect your bottom line. For instance, say you land a contract to provide your services to a company that is a leader in its field. You are excited to get started and do your best work. After a few months, you realize you have been so focused on the job that you have overlooked your time tracking reports. Accurately tracking billable hours ensures you’re not undercharging for your work and helps you maintain a profitable business. When I finally did, I discovered that while I had been billing the client $150 an hour for my work, my pay rate was only $60. Yikes. This blog will help you avoid scenarios like this by breaking down the differences between bill and pay rates so you can make the most money on your next project.
Automatic time tracking software like Tackle will help you get organized to understand precisely what you’re working on, assess performance, and improve your profitability on future projects.
What Is Bill Rate?
The bill rate is the amount that your company will pay to a staffing agency per hour for both their services and the services of a contingent worker. It is simple and a combination of the pay rate and the markup.
To find out how much you will be paying a staffing agency for the entire lifespan of a contingent worker, you can multiply the hourly bill rate by the number of hours that the temporary worker will be working with your business. The bill rate represents the hourly rate you charge clients for services provided.
It factors in:
- Pay rates
- Overhead costs
- Legally mandated costs
- Profit markup
- In service-based industries
A well-calculated bill rate ensures competitive pricing, profitability, and fair worker compensation.
How Does Bill Rate Impact Profit Margins?
Your bill rate should cover all expenses and include a profit margin.
Key costs include:
- Worker pay rates
- Operating costs (e.g., rent, software, utilities)
- Legally mandated costs (e.g., taxes, benefits)
To maintain profitability, your bill rate must do more than cover these and other expenses; it must earn you profit. This is why every bill rate includes a profit margin or markup. The markup protects your bottom line and ensures you don’t operate at a loss. For example, if your total costs per hour are $95 and your profit markup is 20% ($19), your bill rate would be $114/hour. This ensures your business covers all expenses while earning a profit.
What Is Pay Rate?
Pay rate refers to the monetary compensation an employee receives for their work. It’s how much your employees get for their work, including different pay types like overtime, tips, and bonuses. This pay rate will be a big part of an employment agreement.
Many people’s pay rate can be higher or lower based on the work they do, their experience, and the industry they work in. Also, depending on the industry, employees can have different pay rates depending on their work. That’s a lot to think about. Good thing you’re here.
How to Calculate the Rate of Pay
You know the ‘what’ and the ‘why’: let’s move on to the ‘how’. Calculating the pay rate is relatively easy; you just need to ensure you have all the pieces of the equation. We’ll show you how with an example of the rate of pay.
What’s the Pay Rate Timeline?
You need to figure out the timeline for the pay rate. Do you want to calculate the pay rate of an employee for the:
- Week?
- A month?
- A year?
Example: Let’s calculate the pay rate for an employee at a retail store during the busy holiday season. Our timeline will be from December 1st to December 31st.
How Many Hours Did They Work During That Timeline?
Now, you need to add up the total number of hours your employee worked during that timeline. For example, from December 1st to December 31st, the employee worked 132 hours.
Add Up the Totals of the Types of Pay the Employee Earned
To calculate an employee’s full pay rate, you must add the totals of the types of pay earned during that period.
Example:
Employee hourly rate = $13/hour x 132 hours worked = $1716
Bonus earned = $4/hour bonus for 50 hours worked for beating sales targets = $200
Employee commission earned = $400 total on sales
Employee overtime hours = 5 hours at overtime rate of $19.50 = $97.50 $1716 + $200 + $400 + $97.50 = $2413.50
Calculate the Final Pay Rate Per Hour
Now it’s time to put it all together and get the final hourly pay rate.
Example: Total pay of $2413.50 / 132 hours worked = $18.28 final hourly pay rate.
You did it! Now you know your employee’s final pay rate per hour. You can use this information to inform them how those bonuses added up, entice potential employees to work for you, and ensure you aren’t below the state minimum wage.
Effortless Time Management with Tackle
Tracking billable hours doesn’t have to be stressful. With Tackle, you can automatically track time on projects and tasks so you can get back to work instead of worrying about where to store your time logs.
Start using our automatic time tracking software for free with one click today!
Related Reading
- What Are Billable Hours
- Invoice for Hours Worked
- Billable Hours vs Actual Hours
- How to Bill a Client
What Factors Affect Bill Rate vs Pay Rate
Experience and Skill Level: The Key to Higher Pay Rates
Employees with specialized skills and substantial experience can significantly impact bill and pay rates. As professionals gain knowledge, hone their craft, and develop expertise in their field, they become more valuable to businesses and clients.
Employees with industry certifications and unique competencies qualify for more complex projects, leading to increased compensation and higher bill rates.
Local Job Market and Cost of Living
Pay rates vary depending on geographic location. In high-cost areas, salaries must be competitive to attract and retain talent. Understanding regional labor market trends helps ensure fair and attractive compensation.
For example, a marketing professional in Chicago will likely earn a higher salary than a comparable employee in Omaha, Nebraska. While both employees can perform similar tasks, the Chicago employee’s pay rate aligns with the local cost of living and market demand.
Industry Standards and Demand
Specific industries have higher baseline pay rates due to demand for skilled workers. Keeping up with industry benchmarks ensures your rates remain competitive and appealing to job seekers. For example, the labour shortage has hit the construction industry hard, increasing pay rates for all workers, regardless of skill level.
Factors That Affect Bill Rate
Project Scope and Complexity
The bill rate is significantly determined by a project’s size, difficulty, and technical requirements. More complex projects requiring specialized skills or extended timelines often justify higher rates.
Deliverables and Time Commitment
The number and nature of deliverables impact pricing. Projects that require extensive research, multiple revisions, or ongoing support may warrant higher bill rates. Time-sensitive projects or rush jobs can also increase the rate due to urgency.
Overhead Costs and Profit Margin
Beyond direct labor costs, businesses must account for overhead expenses such as:
- Office space
- Software, taxes
- Employee benefits
- Administrative support
Factoring in a reasonable profit margin ensures long-term business sustainability.
Why Understanding Both Rates Is Crucial
Regarding freelance work, the bill and pay rates are two of the most important figures to understand. The bill rate (or what the client pays) is how much a freelancer charges for their work, which is often calculated hourly. The pay rate (or what the freelancer earns) is how much a freelancer makes for every hour worked.
Understanding both rates is crucial for:
- Ensuring profitability
- Maintaining competitive pricing
- Attracting and retaining talent
- Managing business expenses
- Building strong client relationships
By carefully evaluating pay and bill rates, freelancers can create sustainable:
- Pricing models
- Supporting growth
- Employee satisfaction
- Long-term client relationships
Related Reading
- How to Track Virtual Assistant Hours
- Toggl vs Timely
- Attorney Time Tracking Software
- Time Tracking and Invoicing for Freelancers
- Bill Rate vs Pay Rate
- Project Management and Billing Software
How To Calculate An Optimal Bill Rate
1. Start with the Pay Rate
The first piece of the puzzle is the base pay rate, the amount your employee or contractor takes home before taxes and benefits. This number depends on their:
- Skill level
- Experience
- Industry standards
For example, if you’re hiring a software developer, their pay rate will be significantly higher than that of a customer service representative. You need to know this number before you move forward.
2. Factor in Employee Benefits and Taxes
You can’t just think about the hourly wage when setting bill rates.
If you’re paying a full-time employee, there are additional costs like:
- Health insurance
- Retirement contributions
- Payroll taxes
- Paid time off
- Workers’ compensation
These expenses add up fast, typically increasing the total employment cost by 20-40% of the base pay rate. If employees earn $40 per hour, their actual cost to the company could be anywhere from $48 to $56 per hour.
3. Add Operational Costs
Running a business isn’t free. You have overhead expenses that need to be covered, such as:
- Office rent and utilities
- Software and tools
- Employee training
- Administrative costs
- Marketing and business development
Even if you’re a remote business, you likely have software subscriptions, project management tools, or coworking space expenses. Every business is different, but these costs should always be factored into your bill rate.
4. Research Industry Standards
Pricing yourself too low means leaving money on the table, while pricing too high might push potential clients away. That’s why it’s essential to see what other companies in your industry charge. Look at competitors’ rates, industry benchmarks, and even job postings to get an idea of the going rates for your services. You may need to adjust your bill rate if it is far from the industry average.
5. Apply the Right Markup
Now, here’s where the math comes in. You need to set a markup that ensures you’re not just breaking even but making a profit.
A simple formula to use is:
Bill Rate = (Pay Rate + Employee Costs + Overhead) × (1 + Profit Margin)
Let’s say: Your employee’s pay rate is $40 per hour Employee-related costs (benefits, taxes, etc.) add $10 per hour Overhead costs add another $10 per hour You want a 30% profit margin Your bill rate calculation would look like this: (40 + 10 + 10) × 1.30 = 78 So, in this scenario, you’d charge $78 per hour to make sure you’re covering all your expenses and earning a profit.
6. Use the Right Tools for Accuracy
If crunching numbers isn’t your thing, don’t worry. Many online bill rate calculators and accounting software tools can automate this. QuickBooks, FreshBooks, and Harvest all offer features that help calculate bill rates accurately based on real-time data.
By following these steps, you can confidently set a bill rate that keeps your business profitable while remaining fair and competitive.
Related Reading
- Accelo Alternatives
- Hubstaff vs Timedoctor
- Timecamp vs Clockify
- Quickbooks Alternatives
- Clockify vs Harvest
- Freshbooks vs Quickbooks
- Freshbooks Alternatives
Start Using Our Automatic Time Tracking Software for Free with One Click Today
When a company or client pays for an employee’s or contractor’s work, they establish a bill rate. This is the agreed-upon rate for the job, project, or task that both parties have accepted before work begins. Bill rates are also known as markup rates, as they are often calculated by adding a percentage to the worker’s pay rate to determine the final number.
Understanding the difference between these two rates is crucial for workers and employers. For employees or contractors, knowing how to negotiate bill rates can help them earn higher pay rates on their next project. Understanding the relationship between these two rates can help businesses cover project costs and remain profitable.
