Manday calculation and project pricing

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In average, manpower costs in service businesses amount to 70% of total OPEX. Thus, it is the top priority in service pricing and cost control. To calculate the basic cost driver (USD / manday) in your company, you can easily start with distributing cost over the available capacity. However, to arrive at accurate cost or pricing point, you need to understand cost and capacity calculation. All calculations are based on annual basis.

BASICS: WHAT IS YOUR BILLABLE CAPACITY?

First, your employees are not available all year round (i.e. paid sick days, paid holidays). Second, you may have 200 employees, thereof 160 are billable (work on paid assignments for a client) and the rest is back-office and other non-billable staff (HR, finance, marketing…). 

capacity calculation

Now, you can go even further and assume that the maximum billable time per day is 6 hours. The reasoning behind relates to any "overheads" time; coffee time, meetings, any administration and paperwork that can’t be billed to the customer. In such case the net billable capacity can be 25% less than full capacity:

billable capacity

Why is this important? The selling price of your billable workforce needs to cover salaries of your non-billable staff (+ other overheads).

FIX and VARIABLE COSTS

In pricing your capacity you first distribute costs over your billable capacity and then add profit margin. For the sake of MD calculation, your only variable cost are salary costs of your net billable workforce. The rest is overheads, i.e. your pricing needs to cover these. 

fix variable costs in manday calculation

In long term you want to sell capacity at full cost plus profit margin. These full costs include overheads, investments, and capital costs. Dividends are not included, as these are part of the profit margin. MD cost is calculated as costs divided by net billable capacity:

manday cost calculation

Net variable MD cost represent the lowest price point for your projects. You would sell at your variable costs, only in if your capacity is unused and you are expecting new clients/sales soon. Otherwise you should dismiss unused capacity if the "break-up" and rehiring costs are less than keeping the people on payroll. 

Operating MD cost is your bottom line in sales negotiations. The price covers your overheads and interest costs. Always under assumption that your billable capacity is fully billed to the customer (=all billable workforce @ bill 6 hours a day at least).

The full md cost category includes also margin for investments/CAPEX necessary to maintain your operations.

In all cases, you should focus on recurring costs and neglect any costs that are passed on (billed) to your customer.

OVERHEADS MULTIPLE

If the salary cost of your analyst is USD 1000, for how much should sell his workday to a client? Just calculate and use an overheads multiple; e.g. USD 1000 x 1.9 =  USD 1.900. Most likely your overheads  multiple will be between 1.6 - 2.0.

Calculation of overheads multiple:

overheads multiple

PRICING POINTS

You can calculate various levels of your manday costs. At the same time these would be your pricing points:

manday price

CHALLENGES:

-pay attention to billable and nonbillable workforce, especially project managers

-estimate overhead time (meetings, administration) and adjust your net billable time,

-you can define MD costs for each team and seniority level (junior analyst, senior consultant)

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