How to calculate your agency's real hourly cost

Ask an agency owner what a developer costs them per hour and you'll usually get salary divided by 2,080. A $90,000 developer, they'll say, costs about $43 an hour.

On the worked example below, the real figure is $115.83 — nearly three times the estimate. Everything downstream of that number — your rates, your quotes, your margin targets — inherits the error.

The three things missing

Employment costs on top of salary. Employer taxes, pension or retirement contributions, health insurance, equipment, software licences, the desk they sit at. Depending on your country this adds 15–35% to base salary before anyone has worked an hour.

Hours that are paid but not available. Of 2,080 nominal hours a year, take out annual leave, public holidays, and realistic sick days. Most people are actually available for about 1,800.

Hours that are available but not billable. Internal meetings, one-to-ones, recruitment, training, pitching, admin, that Tuesday where nothing worked. This is where estimates go badly wrong. Even a well-run team rarely bills more than 75% of available hours, and 65% is common.

The calculation

Loaded annual cost = salary + employment costs + allocated overhead
Billable hours     = (2,080 − leave − holidays − sick) × utilisation rate
Real hourly cost   = loaded annual cost / billable hours

Overhead means everything that isn't a delivery salary: rent, your own salary if you're not billable, finance and legal, the ops person, insurance, tooling. Total it for the year and divide across your delivery headcount.

Worked example

A developer on a $90,000 salary at a ten-person agency:

Base salary	$90,000
Employer taxes and benefits (22%)	$19,800
Equipment, software, desk	$4,200
Allocated overhead	$30,000
Loaded annual cost	$144,000

Now the hours:

Nominal hours	2,080
Annual leave (25 days)	−200
Public holidays (8 days)	−64
Sick days (5 days)	−40
Available hours	1,776
Utilisation at 70%	1,243 billable hours

$144,000 / 1,243 = $115.83 per billable hour

Against the naive $43, that's an understatement of 169%. Even excluding overhead — a defensible way to calculate it, as long as you cover overhead elsewhere — you're at $91.70, more than double.

What this means for your rates

If your real cost is $115.83 an hour and you bill $130, you're running at 11% margin on that person's time before a single thing goes wrong. One overrun, one unbilled revision, one week where they're between projects, and you're losing money.

A useful rule: your blended charge-out rate wants to be 2.5 to 3 times your loaded hourly cost. That sounds greedy right up until you work through the arithmetic above, and then it looks like survival.

Two levers move the number more than pricing does:

• Utilisation. Going from 65% to 75% cuts your hourly cost by about 13%, because the same fixed cost spreads over more billable hours. This is usually easier than raising rates.
• Team mix. Every hour a senior does mid-level work costs you the difference. On a large project that compounds fast.

Do it once a year

Salaries change, overhead changes, utilisation drifts. Run the calculation every year and after any significant hire. Keep the assumptions written down — particularly the utilisation rate, since it's the one people quietly over-estimate when they want a quote to look competitive.

The number itself matters less than knowing it. Agencies that price from a real cost base say no to bad work earlier, and stop discovering in the post-mortem that a project everyone enjoyed lost money.