I have done an exercise a few times for my current employer to work out the hourly charge out rate he should be charging for his engineers.
Up until now i have been using a fairly simple method
1. Collate all the overheads
2. Divide overheads by the number of productive hours to give you a overhead rate per hour
3. Add this rate to the hourly rate of the engineer plus employers NI
4. Resulting figure is hourly rate to charge out engineers to cover his wages and overheads
(The above method was given to us by a PWC accountant)
Is this the method most folk on here use? Reason i ask is that the industry we are in, Telecoms, is very competitive and when i show the MD this figure, he nearly spits his tea out, and suggest the figures are too high and unrealistic to achieve.
Does anybody see a flaw in the above or have any similar experiences? One issue i've always struggled with is what overheads to include.
Another way could be to try target costing, that is start with a competitive price, deduct variable costs and a viable profit margin, that leaves you with the total available to cover overheads. Then do a break even computation to establish how many man hours would be necessary to cover fixed costs (overheads). This approach would also focus attention on costs and the need to drive them down.
I will have a go at this method, the MD of the company certainly has a price he thinks is competitive so this reverse engineering so to speak would be a useful excercise.
