Today, we will be discussing service pricing for government contracts. This is not an easy task and took me a day to do all the calculations. (It would have gone faster but those darn interruptions.) DISCLAIMER. “I wanted to take a moment and tell you that I am not a Certified Public Accountant (CPA) and you should always consult with your accountant and have them help you compute your service pricing. If you do not have an accountant you can find one here.”
Recently, a comment was left on my YouTube Channel (Federal Contracting Made Easy) asking me to walk through pricing services. We did just that based on my knowledge. Step one is to determine our hourly overhead expense.
Hourly Overhead Expense + Hourly Wage + Profit = Total Price Per Hour
Well, that seems simple enough! We first must figure out our hourly overhead expenses. Next, we need to break it down by the parts.
Hourly Overhead Expenses
Your hourly overhead expenses are going to be a list of all costs that are not part of the service that you provide. In accounting terms, expenses that are not part of a product or service are known as General and Administrative (G&A) expenses. Typical examples are rent, utilities, insurance, and managerial salaries. If you look at your income statement, these expenses will appear under operating expenses.
Let’s look at an example. To do this, you will need to convert the expense into a monthly number. My business insurance has been paid yearly. I took that number and divided it by 12 to get the monthly cost.
To figure out my monthly expense for my office, I had to figure out the cost per square foot. To do this, I divided the total square feet of the home by the mortgage cost. Then I had to find out how many square feet my home office occupied. We grabbed the old tape measure and got the room dimensions. It is approximately 11’ x 12’. I multiplied that out, and it came to 132 square feet. Now I take the cost per square foot and multiply that by 132 square feet. That gave me my home office monthly expense.
Lots of math later!
Now do the same for all the expenses for your business and come up with a total cost. Be prepared as this will take some time!
The last step in this section is to figure out your average monthly hours worked. To make this easy on myself, I know that the average person works 2,080 hours per year. Just Google it. Then we divided this number by 12 to come up with average work hours per month. Now divide the total expense by the monthly work hours to come up with your Hourly Overhead Expense rate. Phew, that was a ton of calculations! Up next is computing our hourly wage!
The easiest way to compute this number is to use the following formula that is taught in business school. FORMULA: Add your labor and overhead costs plus profit and divide this number by total hours worked. I spent a ton of time on this for myself. We ended up taking the average salary for a “Management Consultant” and used that number. We did not want to price me too high. I took the salary to be paid yearly and divided that by 2,080 average work hours in a year. This number became my hourly wage. See picture below.
Now let’s go on to the next step. We are figuring out the amount of profit.
Lastly, we need to add a number into our spreadsheet for profit. The easiest way is to add a factor to your hourly wage to provide for profit. I took my hourly salary and multiplied it by 7%. My hourly overhead rate ended up being $46.60. It is best to create a spreadsheet to help you do the calculations. If I were to do this differently, I would put all the information need on the second tab in Excel. The just input the formulas on the main page. You can link the equations to the second page. That way to update it all you would have to do is to enter the numbers on the second tab.
In Conclusion, We hope you were able to see how to calculate these numbers for yourself. It will be different for every business even within the same industry.
Consequently, if you want me to create a spreadsheet for you, I can do that for a nominal fee. You may have to revise it based on your circumstances. Now before we end this blog, please remember to get with your accountant. He or she may already have a way to compute your service pricing, or they may even have a spreadsheet readily available for you.
We hope you enjoyed the blog on a service pricing formula. Please remember to subscribe and leave a comment. Be kind with your comments, please! Also, like the video. It helps our videos get out to more people. Until next time be safe.