Ask an agency owner what an hour of a mid-weight designer costs and you usually get salary divided by the hours in a year. A $75,000 salary over 2,080 hours is about $36 an hour, so anything above that is profit.
It is not, and the real figure is often more than double.
Start with the true cost of employment
Salary is the largest line, not the only one. Add:
- Employer costs — national insurance or payroll taxes, pension contributions, statutory insurance. Typically 15–20% on top of salary.
- Benefits — healthcare, equipment, software seats, training budget, the laptop refresh. Small individually, several thousand a year together.
- Overhead, apportioned — rent, utilities, insurance, accountants, the finance and ops people who are never billable, the subscriptions the whole agency runs on.
For a $75,000 salary, a fully loaded cost of $105,000–$115,000 is normal once overhead is in. That is the number the hours have to cover.
Then fix the denominator
This is the part that actually breaks the calculation, and it is the same mistake as miscounting utilization.
A year contains roughly 2,080 working hours. Nobody delivers 2,080 hours of client work. Take out:
- Holiday — 25 days plus public holidays is around 250 hours
- Sickness — a week or so, call it 40 hours
- Everything that is not client work — internal meetings, admin, training, new business, line management, tooling
That last one is the big one. At a healthy 70% utilization, a person delivers about 1,250 billable hours a year, not 2,080.
True cost per billable hour = fully loaded cost ÷ billable hours
= $110,000 ÷ 1,250
= $88
Not $36. The naive calculation understated the cost by well over half, and it did so on the side that makes underpricing look profitable.
What this changes
Your floor is higher than you thought. At $88 an hour of cost, a $125 hourly rate is a 30% gross margin before a single write-off, discount or overrun. That is thin for an agency, and it explains a lot of businesses that are busy, fully booked, and somehow never have any money.
Discounting is more expensive than it looks. Knocking 15% off a $150 rate does not cost you 15%. It takes $150 down to $127.50 against an $88 cost, so gross margin falls from $62 to $39.50 — a 36% cut in the actual profit. This is worth internalising before the next negotiation.
Utilization and price are the same conversation. If utilization drops from 70% to 60%, billable hours fall to about 1,070 and the same person now costs $103 an hour. Nothing about their salary changed. A quiet quarter raises your cost base whether or not you notice.
Do it per role, not per agency
An agency-wide blended rate is fine for a quick sanity check and useless for pricing a specific piece of work. A junior at $60 an hour of cost and a senior at $140 are different businesses, and a project staffed mostly by the latter can lose money at a rate that would be comfortable for the former.
Work out the number for each role, then price the shape of the team the work actually needs.
Recalculate once a year
Salaries move, overhead moves, and utilization moves more than either. A cost base worked out three years ago and never revisited is one of the more reliable ways to find yourself quoting confidently at a loss.
Put an hour in the diary each January. It is the highest-value hour of admin an agency owner does all year, and it makes every pricing conversation for the following twelve months a matter of arithmetic rather than nerve.