What to Charge: Estimating the Wage Rate

August 12, 2004
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Crunch the numbers before quoting a rate


Chart 1
An estimate is a general calculation for providing a service or services, based on industry standards and past experiences. An estimate should take into consideration all of the factors that will affect the end result of providing the service.

It is accepted business standards not to authorize services without one. There are some rare exceptions, but even these will require some pricing guidelines.

There are times when providing an estimate is very difficult, usually due to conditions or constraints on the project. When this occurs you will most likely be asked to provide an hourly wage rate. This type of work is often categorized as a time-and-materials job, meaning that the customer will pay for the supplies used and a wage rate for the hours you will spend on the project. The supply costs for these jobs requires receipts, but the client will want to know what that wage rate is before starting.

Wage Rate
The wage rate is the hourly dollar amount you would pay an employee or yourself to perform the service. The base wage rate is generally governed by a local union, or independently by the company or facility, and by established local wages. Included in the wage rate are vacation and holiday amounts. These expenses are usually represented as a percentage of the wage. The vacation and holiday cost are added to the wage to establish the total wage cost.

Taxes
Everyone pays taxes, including businesses. Check with your accountant to be sure that you are covering all of the necessary taxes. Taxes are usually represented as a percentage or multiplier. Federal Income Tax (FIT), Social Security Tax (FICA), Federal Unemployment Insurance (FUTA) state, county, city and local taxes all have to be included. The taxes are figured into the calculation by multiplying each tax rate by the total wage cost. Add them all together for the total tax cost.

Insurance
Insurance is also another must-pay expense and one that is vitally important. Be sure that you have the correct amount of insurance and bonding for your business. Workers compensation and bonding are two key components of the calculation. Insurance agents can help you with this figure.

Benefits
Most companies today offer some form of benefit package or another. The costs for these additional expenses need to be calculated. If you offer a benefit package it is imperative that you capture all of those costs into your wage rate.

Medical Insurance
Medical, dental and vision insurance are separate from business insurance. They are computed by multiplying a fixed percentage by the total wage cost.

Pension Plan If your company supports a pension or 401k plan, it will usually stand alone as a flat rate to be calculated based on hours worked.

Uniforms
In the past, uniforms were predominately to help the technicians look good and be easily identifiable as a member of the team. In today's world of ever increasing security, uniforms are being required to make it easier to determine who is supposed to be where. Additionally, security ID badges have become more prevalent. These costs should be wrapped into the wage rate. This can be calculated by establishing the annual price and divide it by the number of annual hours an employee will work.

Union
In many cities, unions are predominating, and the employees may have to pay union dues. The union dues may be monthly or annually; either way, the costs have to be built into the wage rate.

Miscellaneous Benefits
Your company may offer additional benefits; each of these will have to be calculated into the wage rate cost.

Additional Costs
There may be additional costs that are required for this particular task, rental of specialty equipment or some other type of cost. The cost should be added to the wage rate.

Markup or Profit Margin
Now that you have assembled all of the overhead costs, you may add the markup or profit margin. Be sure you understand that markup is not profit margin. Markup is percent profit versus cost, while profit margin is percent profit versus selling price (Chart 1).

Each company will have its own hourly wage rate for calculating time and materials type jobs. The wage rate you use will be contingent on all of the taxes and insurances, as well as benefits that you may offer. Uniforms, union dues and any additional factors need to be computed to ensure an accurate wage rate. Understanding what goes into a wage rate and how the calculation is made will help make you more profitable.

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