Calculation of the internal employee cost rate

On this page we make a suggestion for how you can determine the employee cost rate - i.e. the internal hourly rate of each individual employee.

Spoiler: In most companies it is between 45 and 80 EUR.

Upfront: We are not auditors and this is not financial advice; the number should better be calculated by your tax advisor. The higher it is, the more conservative the value. So it can make sense to set the number higher than the value you calculated.

A rule of thumb could be:

All overhead costs : number of hours of the team = cost per hour worked

What are overhead costs?

Under overhead costs you understand all general or indirect costs of your company that cannot be directly assigned to a single customer job. They are incurred regardless of whether a specific assignment is being carried out or not. Typical examples are:

• Personnel costs (e.g. salaries, wage tax and social security contributions for permanently employed staff or management who do not work exclusively on customer jobs)

• Rent and ongoing costs (e.g. for offices or storage)

• Internal events (e.g. team-building activities, training, company parties)

• Vehicle fleet or company cars

• General travel and advertising costs, which not are directly assigned to a customer job

• Catering and kitchenette (e.g. coffee, tea, water and snacks)

• Software licenses and other internal tools that are not project-related

• Insurances and contributions to associations etc.

If you want to be very precise, you also add an estimated value for:

• Depreciation you should usually include in the overhead costs because they reflect ongoing costs that do not only occur for specific jobs.

• Taxes (unless these are pass-through items such as VAT) you can, depending on the desired transparency of your calculation, consider them either directly as overhead costs (e.g. trade tax) or indirectly as part of your profit margin (e.g. income/corporation tax).

All of these expenses must be financed and therefore are reflected in an internal hourly rate to ensure that total operating costs are covered.

For which period do we determine the hourly rate?

You can therefore only determine the cost rate retrospectively - for a period you choose yourself. So that you do not have to go through this process too often, we recommend determining the values only once a year. The divisor "number of hours of the team" must of course be determined for the same period (e.g. the last year).

How many hours does my team or a specific employee work?

For your cost structure it does not matter whether an employee is fully occupied with customer jobs or not. As long as they are on your payroll, corresponding costs arise in connection with them (salary) and their workplace.

That is, for a 50% part-time position, for example, it is

(52 weeks x 2.5 days) - 25 days (vacation) - 14 days (illness) = 91 days x 8 hours = 728 hours agreed working time

Individual hourly rates or an average hourly rate for all employees?

You can store an identical employee cost rate for all employees regardless of salary ...

All overhead costs : number of hours of the team = average cost per hour worked

...or calculate an individual hourly rate for each employee proportionally. The overhead costs are then determined without gross salary.

So you first add up all overhead costs except gross salaries and divide these by the sum of the agreed hours of all employees, because these costs are distributed equally across everyone.

( All overhead costs excluding salaries

x number of agreed hours of the employee

: number of agreed hours of all employees

+ gross salary of the employee under consideration

)

: number of agreed hours of the employee under consideration

= individual employee cost rate of the employee under consideration

When in doubt, use the value more conservatively!

Since you may not be able to predict certain overhead costs for the future or the current year exactly - e.g. an employee's sick leave or unforeseeable costs due to legal advice, employee mistakes in purchasing, etc. - it can make sense to round the value up generously so that the impression does not arise that everything is running smoothly.

Note: Be careful not to price customer jobs based on this internal cost rate! Your customers should pay the agreed sold hourly rate, not the internal hourly rate. Example calculation: You agreed a service of 10 h at 100 EUR = 1,000 EUR The internal hourly rate is 50 EUR If the team now needs 20 hours instead of the planned 10 hours, you did not make a profit on the project, but only incurred costs. If the team needs 22 hours, you effectively contribute 100 EUR to complete the project.