Run the numbers on last quarter and your projects look healthy. The designer’s hours are in there at cost, and so are the junior’s. Yours went in at nothing, or at whatever you took home, and you worked more of them than anyone.
The omission is easy to make. Nobody pays you by the hour, so there’s no ready number to use. What you took home was whatever was left at the end of the month, or a salary you set years ago and haven’t looked at since, and neither has much to do with what your work would cost to buy. Your time feels like something you give the firm, and nobody thinks to charge a project for it.
So every project you worked on shows a better margin than it earned, and the ones you did mostly yourself are flattered the most.
Two projects
Say the firm is you, a designer and a junior, and look at two projects from last quarter.
Marlow was a fixed-fee rebrand at $24,000. The designer did most of it and the junior handled production. You ran the client, directed the work and presented twice, which came to fifty-five hours.
Revenue fixed fee $24,000
Cost designer 70 h × $65 = -$4,550
junior 40 h × $45 = -$1,800
you 55 h × $0 = $0
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Profit $17,650
Margin 74%
Penrose was hourly at $140, a small site for a client you’ve known for years. The junior built it. You did the discovery, the wireframes, the copy and most of the calls, because briefing anyone would have taken longer than doing it. Sixty hours, forty of them billed.
Revenue junior 30 h × $140 = $4,200
you 40 h × $140 = $5,600
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$9,800
Cost junior 30 h × $45 = -$1,350
you 60 h × $0 = $0
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Profit $8,450
Margin 86%
On margin, Penrose is the better project by a distance, and the firm should be looking for more like it. Both conclusions depend on your hours costing nothing.
What an owner’s hour costs
The cost rate that belongs in your row is what you’d pay someone else to do the project work you do.
The $140 you bill is what a client pays for the hour. Put it in the cost column and every billable hour you work shows no profit at all, which tells you nothing. What you actually took home is no better a guide. If you paid yourself $60,000 last year because that was what was left after everyone else, the figure measures what the firm could afford that year. Use it as your rate and the shortfall vanishes into the project margins, the one place you’ll never find it again.
The question to ask is what it would cost to hire someone senior enough to run those clients, direct the work and give the presentations. Say $135,000 a year, or about $162,000 once payroll taxes and benefits are in. Divide that by the hours you actually work. The standard 2,080 overstates them, because nobody pays you separately for holidays and the weeks off are already in the price of the weeks on. At 1,800 hours it comes to $90.
Ninety dollars is a rough figure, and rough is fine. The number it replaces is zero, or one chosen for the tax return.
The same two projects
Revenue fixed fee $24,000
Cost designer 70 h × $65 = -$4,550
junior 40 h × $45 = -$1,800
you 55 h × $90 = -$4,950
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Profit $12,700
Margin 53%
Revenue $9,800
Cost junior 30 h × $45 = -$1,350
you 60 h × $90 = -$5,400
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Profit $3,050
Margin 31%
Marlow, the project you handed off, now makes four times the profit of Penrose at a margin the firm can live on. Penrose, the one you mostly did yourself, turns out to be a thin job that looked like the best thing in the quarter because your sixty hours were invisible. Every hour anyone worked on Marlow returned $77 of profit. On Penrose the figure is $34.
What the zero was hiding
Your own billable hour is the place to start. Billed at $140 against $90 of cost, it clears $50 before overhead. The junior’s, billed at the same $140 against $45, clears $95. On hourly work at a single rate, the least experienced person in the firm is the most profitable one to have on the clock and you are the least, which is roughly the opposite of how it feels.
It follows that the work you keep for yourself is the work most likely to be underpriced. Penrose felt efficient because you skipped the briefing and got on with it, and in hours it was. Those hours were also the most expensive in the building, and twenty of them never reached an invoice.
Hiring looks unaffordable for longer than it should. While your time is free, a designer at $65 an hour is pure cost, set against work you would otherwise have done for nothing. Once your time is $90, the designer is the cheaper way to get that work done, and the question becomes what your freed hours are worth. On Penrose they billed at $140.
Anyone who looks at the firm from outside, whether a buyer, a lender or a prospective partner, will put a price on your hours whether you did or not. It’s better to know the number before they do.
The rest of your year
Fifty-five hours on Marlow and sixty on Penrose don’t add up to a year. If you worked 1,800 hours and 900 of them went to projects, the other 900 went to proposals, invoices, hiring, the accountant and the inbox. Those hours carry the same $90 and belong to no project. They’re overhead, and every project’s margin has to clear them before the firm has made anything. That’s a separate calculation, and it’s how a year of projects at 50% margin can still end with nothing in it.
Putting a rate in the row
Log your own hours like anyone else’s and give your row a cost rate, and that is the whole of the change. The hard part is keeping it up. Your hours are the first to go unrecorded when the week fills, and an unrecorded hour is a free one.
Fini treats you as a member of the team with a cost rate of your own. Every hour you log carries that cost, billable or not, and profit and margin come out by project, client and person. The Penroses show up with your hours in them.
Try it on last quarter
Take the three projects you spent the most of your own time on, add your hours at what it would cost to replace you, and watch the margins move.