Uncover your true Effective Hourly Rate (EHR), quantify unbilled revision erosion, and calculate real project gross and net profit margins before signing.
| Contract Gross Revenue | $15,000.00 |
| Direct Labor Cost (125 hrs @ $45) | -$5,625.00 |
| Direct Project Expenses (COGS) | -$600.00 |
| Gross Margin Contribution | $8,775.00 (58.5%) |
| Allocated Operating Overhead (25%) | -$1,406.25 |
| Final Net Retained Profit | $7,368.75 (49.1%) |
At your current cost structure ($45/hr labor + 25% overhead), you can absorb up to 131.1 additional hours of unbilled work before this client engagement turns into a net cash loss.
Your quoted rate is what you pitch to the client (e.g. $15,000 / 80 quoted hours = $187.50/hr). However, client work invariably includes unbilled meetings, back-and-forth Slack communication, scope revisions, and admin overhead. Your Effective Hourly Rate (EHR) divides contract revenue by the REAL total hours invested. If a project expands to 125 total hours, your actual realized rate drops to $120.00/hr—a 36% erosion.
Agency Labor Efficiency Ratio (LER = Gross Revenue / Direct Labor Cost) measures how many dollars of top-line revenue your team generates per dollar of direct payroll. Greg Crabtree and boutique agency benchmarks recommend an LER of at least 3.0x for healthy sustainable profitability, allowing sufficient margin to cover overhead and owner profit.
In fixed-price projects, every unpaid hour directly increases direct labor cost. Because contract revenue remains fixed, unbilled hours compress gross margin dollar-for-dollar. For a project with tight quoted margins, adding just 20 hours of scope creep can erase all anticipated agency profit.
In addition to direct employee or contractor wages, running an agency requires software licenses, legal, accounting, office, and management overhead. Standard financial practice applies an overhead allocation rate (typically 20% to 35% of direct labor cost) to establish the true loaded cost of delivery.
The consulting Rule of 3 dictates that project fees should be roughly 3x the base employee labor cost: one-third covers the direct delivery talent, one-third covers business overhead and non-billable time, and one-third represents net operating profit.
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