If you want to know how to calculate a charge-out rate that actually pays for your engineers, the answer isn’t salary divided by hours in the year. That sum leaves out employer costs, overheads and, above all, the hours nobody can bill. For an engineering, technical or SaaS services firm with 10 to 50 staff, a rate that looks sensible can quietly turn a full order book into a loss. This guide shows the full sum, a worked example, and checks you can run on your own rates this week.

Why the simple sum gets it wrong

Most firms set rates by copying a competitor, adding a bit to last year’s figure, or dividing salary by a rough number of hours and doubling it. Each of these misses at least one of three things:

• Employment costs on top of salary: employer National Insurance, pension and benefits.
• Overheads: office, software, insurance, admin and management time, and the directors’ hours spent selling and running the business.
• Utilisation: the share of paid hours that end up on a timesheet you can invoice. It is never 100%.

Get any one of them wrong and every hour you sell is underpriced, however busy you are.

How to calculate a charge-out rate in five steps

1. Work out the full cost of each person

Start with salary, then add employer National Insurance and pension. For 2026 to 2027, employer Class 1 National Insurance is 15% on earnings above £5,000 a year. Under auto-enrolment, employers must pay at least 3% of qualifying earnings into a workplace pension, and many pay more. Add any benefits you pay per person, such as health cover or a car allowance. Your accountant or payroll provider can give you the exact employer cost per person.

2. Count the hours each person is actually available

A full-time year is 52 weeks of five days, or 260 working days. Take off holiday: a five-day worker is entitled to 28 days of paid holiday a year, which can include bank holidays. Then take off a realistic allowance for sickness and training. Multiply what’s left by the length of a working day.

3. Apply a realistic utilisation rate

Utilisation is chargeable hours divided by available hours. Engineers spend time on proposals, internal meetings, CPD, rework nobody will pay for, and admin. Use your own timesheets from the last six months to find the real figure for each grade, not the figure you hoped for. If you don’t record non-chargeable time, start now: without it you are guessing.

4. Share out overheads

Add up everything that isn’t a fee-earner’s employment cost: rent, software, professional indemnity insurance, vehicles, accounts and admin staff, marketing, and the cost of any director time that isn’t billed. Divide it by the number of fee-earners. A finer method splits overheads by chargeable hours, so seniors who bill less carry less, but an even split is a fair place to start.

5. Add your profit margin

Add the person’s full cost to their share of overheads, then divide by their chargeable hours. That is your break-even rate. To build in a profit margin, divide the break-even rate by (1 − margin). A 20% margin means dividing by 0.8. Note that a 20% margin is a 25% markup on cost: mixing the two up is a common pricing error, and we cover it in checking job margins.

A worked example

Take a made-up firm, Example Civil Design Ltd, with 18 staff, 14 of whom are fee-earning engineers. Every figure below is an assumption for illustration.

• Engineer’s salary: £45,000.
• Employer National Insurance: (£45,000 − £5,000) × 15% = £6,000.
• Employer pension at 5% of salary (the firm’s own policy, above the legal minimum): £2,250.
• Full employment cost: £45,000 + £6,000 + £2,250 = £53,250.
• Overheads: £420,000 a year ÷ 14 fee-earners = £30,000 each.
• Total cost per engineer: £53,250 + £30,000 = £83,250.

Available hours: 260 days − 28 days’ holiday − 4 days’ sickness and training = 228 days. At 7.5 hours a day, that’s 1,710 hours.

The firm’s timesheets show 75% utilisation, so each engineer bills 1,710 × 75% = 1,282.5 hours.

• Break-even rate: £83,250 ÷ 1,282.5 = £64.91 an hour.
• Rate with a 20% margin: £64.91 ÷ 0.8 = £81.14 an hour.

What happens if the firm ignores utilisation

Suppose the firm worked out its rate on all 1,710 available hours instead: £83,250 ÷ 1,710 = £48.68 break-even, or £60.86 with a 20% margin. That rate looks like it includes a healthy profit.

But the engineers still only bill 1,282.5 hours each. Across 14 engineers that’s 17,955 hours × £60.86 = about £1,092,700 of fees, against costs of 14 × £83,250 = £1,165,500. The firm makes a loss of about £72,800, while every quote it sends appears to be priced at a 20% margin.

Utilisation also cuts the other way. At the correct £81.14 rate, raising utilisation by five percentage points adds 1,710 × 5% = 85.5 billable hours per engineer, or 1,197 hours across the team: about £97,100 of extra fees a year from time that is already being paid for.

Common mistakes to check for

• One rate for everyone. A graduate and a principal engineer have different costs and different utilisation. Work out each grade separately.
• Rates set once and left. Pay rises every year. If your rates haven’t moved in two years, see our guide to the signs your business is underpricing.
• Discounting the rate rather than the scope. If a customer pushes back, reduce what you deliver, not the hourly figure.
• Fixed fees built from optimistic hours. A fixed fee is a charge-out rate multiplied by an estimate. If the estimate is short, the rate is effectively lower.
• Unbilled extras. Site visits, revisions and calls that never reach an invoice lower your real rate just as surely as a discount.

What to do this week

• Pull your last six months of timesheets and work out utilisation by grade.
• Ask your accountant or payroll provider for the full employment cost of each grade.
• Total your annual overheads from your management accounts and divide by the number of fee-earners.
• Run the five-step sum for each grade and compare it with what you charge now.
• Pick your three largest customers and check what rate they actually paid on their last job: fees invoiced divided by hours recorded.
• If your rates are short, plan the change. Our guide on how to raise prices without losing customers covers the sum and the wording.

For SaaS businesses that also sell implementation or consulting days, the same method applies to those services: price them from cost and utilisation, not as an afterthought to the licence.

Find out what your rates are costing you

A charge-out rate is one of the leaks we put a £ figure on in a review, alongside quoting, invoicing and late payment. You can see how the review works and our packages and prices.

To get a rough figure for your own business in about two minutes, try our free leak calculator. If you’d like to go through your rates with us, book a free 30-minute call.