Hourly billable rate:
formula and worked example

Pricing time when only some of it is billable

A freelancer, consultant or small agency sells time, but not all of it. Proposals, admin, training, client chasing and quiet weeks all take hours that nobody pays for. The hourly billable rate is the price per invoiceable hour that makes the whole month, including those unpaid hours, add up to the income you need.

Many people set a rate by copying a peer or by dividing a desired salary by every working hour. Both approaches tend to underprice, because they ignore the fraction of time that cannot be billed. Starting from the revenue you need and the realistic number of billable hours gives a rate that stands on your own numbers.

The approach has a side benefit: it makes trade-offs visible. If the rate that hits your target is higher than clients will pay, you can see exactly which lever to pull: lower costs, more billable hours, or a different type of work. A rate chosen by feel hides those choices, and the shortfall only appears in the bank balance.

Formula and the two inputs

• Target revenue: the sum of your desired pay, business costs, tax provision and a margin for profit or contingencies, for one period such as a month.
• Billable hours: hours invoiced to clients in the same period, after subtracting admin, marketing, leave and unpaid revisions.

The ratio of billable to total working hours is called utilisation. Someone working 160 hours a month and billing 120 has a utilisation of 75%, a realistic figure for many solo professionals.

Worked example: 240,000 over 120 billable hours

A freelance designer wants to bring in 240,000 each month to cover personal income, software, a co-working desk and a tax reserve. They expect to bill 120 hours a month.

1. 1Set the target revenue for the month: 240,000.
2. 2Estimate billable hours, after non-billable work: 120.
3. 3Divide: 240,000 ÷ 120 = 2,000.
4. 4The rate that meets the target is 2,000 per hour.

Had the designer divided by all 160 working hours instead, the rate would be 1,500 and the target would be missed by 60,000 at the same workload.

Checking whether 2,000 an hour is workable

The calculation gives the minimum rate to hit a target, not the rate the market will pay. Treat it as a floor and test it against what clients accept.

• If the market will pay less than the result, you need fewer costs, more billable hours or a different mix of work.
• If clients accept a rate above it, the difference is profit or a buffer for quiet months.
• Fixed-fee projects can still be checked: divide the fee by the hours you expect to spend and compare with the hourly floor.
• Revisit the rate when utilisation changes. Dropping from 120 to 100 billable hours requires 2,400 an hour for the same target.

Experience, specialisation and the value of the outcome to the client all influence what the market will bear. Two people with the same costs may rightly charge very different rates. Treat the calculated rate as the number you must not go below, then consider value-based pricing for work where the client's gain is much larger than your time.

How a bigger target changes the rate

Because billable hours are fixed, the rate rises in line with the target: 264,000 requires 2,200 an hour. A 10% income goal often means more than 10% on the rate if hours also fall, so it is worth testing both changes together rather than one at a time.

Mistakes that leave the rate too low

• Dividing by total working hours and ignoring the time spent on admin, sales and unpaid revisions.
• Leaving out holidays, sick days and slow months when estimating billable hours.
• Setting target revenue as take-home pay only and forgetting business costs and taxes.
• Not adjusting when the work mix changes, such as taking on more discovery calls that are not billed.

Consider seasonality and the pipeline. Work often arrives in lumps, so a rate calculated from an average month may feel too low in busy periods and the cushion too thin in quiet ones. Reviewing the rate every quarter, using the previous quarter's real billable hours and costs, keeps it tied to reality. If your utilisation has stayed well above or below plan, change the rate or the workload rather than waiting for the year to end.

Testing the rate against a real month

Suppose you quote 2,000 per hour but only bill 90 hours. Revenue is 180,000, which is 60,000 below the target, despite every hour being priced correctly. The gap comes from utilisation, not pricing. Before raising your rate, check how many hours slipped away through unpaid revisions or client delays, since fixing that can be easier than persuading clients to pay more.

Also build in room for the unexpected. A client who delays feedback, a project that overruns, or a month lost to illness all cut billable hours. Setting the plan on, say, ten fewer billable hours than your best estimate gives a rate with a cushion, and the occasional good month then becomes profit instead of a recovery.