Free Billable Rate Calculator for Interior Designers + How to Set Your Ideal Rates for Profitability!
We often hear that because a designer is self-employed, their time is “free.” This couldn’t be further from the truth because everyone knows how skilled you are and how hard you work. Saying that your cost is $0/hour is not only devaluing yourself, it’s skewing your profit and margin numbers higher than they are in reality. Think of it this way: How much would that cost you if you hired someone to perform or replace your role? A lot, right? Definitely not $0/hour!
This guide will help you understand why valuing your time is crucial and provide easy steps to calculate your and your employees' hourly rates. Valuing your time correctly will allow you to be financially successful and fulfilled, knowing that your clients also see how valuable your time is.
When I meet with a new client, I always ask them if they track their time. If they say no, I tell them to start right away. Even if you don't bill hourly, you should be tracking your time. There's no way to know if you're profitable if you don't have the data to analyze. If you charged a flat fee of $10k for a project and somehow ended up spending over 200 hours on it, then you only made $50 per hour. If you didn't track your time, you'd never know!
— Shannon Palermo, Modern Balance
Why Valuing Your Time Matters
Fair Compensation
Your time and expertise are valuable. Properly valuing your time ensures you are paid fairly for your work, preventing underpricing and burnout.
Business Profitability
Accurate valuation helps maintain your business's financial health, covering costs and allowing for growth. Excluding the cost of your time is a common pitfall that leads to inflated profitability and discontent compared to the time invested in the business. At the end of the day, hopefully, you love what you do, but you have to make money!
Client Perception
Appropriate pricing reflects professionalism and high standards, enhancing clients' perception of your services. Recently, in the Interior Collective Podcast Season 4, Episode 12, when Anastasia Casey asked Brad Levitt about working with designers, he said “when a client comes to me asking to work without a designer, I let them know it will be $150,000 minimum for my team to do the design work.” - talk about helping designers win.
The lowest quote/price is often not what premium clients are looking for, and underpricing can actually harm your brand/image.
— Bradford Schumann, Bradford Tax & Consulting
Calculating Your Hourly Cost Rate
There are two ways to determine the basis of your cost rate: desired annual salary (how much you’d like to take home in a year pre-tax) and replacement cost (how much it would cost to replace yourself in the business). Both are valid methods and will help build a foundation for your cost and billable rates. Your bookkeeper or accountant most likely has a preferred method, so we suggest consulting with them.
Method A: Desired Annual Salary
Decide on a reasonable annual salary that reflects your experience and skills. If unsure, consult your bookkeeper or accountant, Facebook groups, or websites with salary information like indeed.com. Some examples you may want to explore are the Interior Design Standard (Sandra Funk) and the Interior Design Business Forum (Nancy Ganzekaufer).
It’s important to use a realistic salary to have accurate numbers. If you land on a number that is too low, your billable rate calculated from your cost rate will be too low, and you could lose money. Too high, and you could price yourself out of work, resulting in forgone revenue.
Formula:
Hourly Cost Rate = Desired Annual Salary / 2,080
Example:
If your desired annual salary is $125k, the calculation is $125,000/2,080 = $60.01.
Method B: Replacement Cost Salary
How much would hiring someone full-time to do your work cost? Consider your unique skills and what a mega-firm would pay you for your services. Would that be $80k/year? $125k/year? Maybe $150k/year? This will be an estimate but a good way to gauge the value you create.
Formula:
Hourly Cost Rate = Replacement Cost Salary / 2,080 Hours per year
Example:
If the cost to hire someone to replace yourself is $125,000, the calculation is $125,000/2,080 = $60.01.
This is your effective “cost rate.” In simple terms, for every hour you work, this is the amount of money it costs your business to perform your services.
Calculate your most profitable design rate with our free billable rate calculator!
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Calculating Your Employees' Hourly Cost Rates
Step 1: Employees' Annual Salaries
List your employees' annual salaries.
Step 2: Additional Costs
Include benefits, payroll taxes (FICA, FUTA, SUTA, etc.), workers compensation insurance, and other employee-related expenses.
Your bookkeeper or accountant can provide this information, but generally, this can be an additional 25-40% of their salary. After everything is considered, an employee with a $75k salary can cost $93,750/year. That’s an extra $18,750 that we need to account for!
Step 3: Total Employee Costs
Add salaries and additional costs.
Formula:
Total Employee Costs = Annual Salary + Additional Employee Costs
Step 5: Employee Hourly Cost Rate
Divide total employee costs by the standard 2,080 working hours per year.
Formula:
Employee Hourly Cost Rate = Total Employee Costs / Employee Billable Hours
Example:
Using the example above of a $65k/year salary employee:
Total employee costs ($65k × 25% add’l costs) / 2,080 billable hours = $39.06 hourly cost rate
Setting Your Billable Rates
Step 1: Determine Profit Margin
Decide on a profit margin, typically two to three times your cost rates (also referred to as a “cost multiplier”). In margin terms, that’s 200% to 300% of your rates. Again, consult your bookkeeper, accountant, and any industry groups to determine what is best for your business.
Step 2: Billable Rate
Add your profit margin to the cost rate.
Formula:
Billable Rate = Hourly Cost Rate × Profit Margin
Example:
Here’s an example using the numbers previously discussed.
Your billable rate:
$60.01 × 250% profit margin = $150.03 billable rate
Your employee’s billable rate:
$39.06 × 250% profit margin = $97.65 billable rate
Tips for Success
Track Time: Use Materio to track every billable and non-billable hour.
Don’t fall into the trap of losing money because you are not accurately tracking your time! Time not billed is money left on the table.
Use varying rates when appropriate: Charge more for higher-skilled services like custom furniture design, conceptual design, and project management. Use a lower rate for site visits and administrative work like product sourcing. Also, don’t forget about travel time!
Materio helps facilitate this by setting rates per employee and activity.
Be Transparent: Clearly explain your rates to clients to build trust. Include them in your contracts and design agreements. Setting expectations in the first conversation avoids ambiguity.
Market Research: Ensure your rates are competitive and you value your time correctly. More experienced and well-known designers can command higher rates.
Consider the Project Scope: Larger and more complex projects can justify higher profit margins due to the increased responsibility and resource allocation.
Conclusion
Valuing your time and accurately calculating cost rates are essential for your interior design business's success. Following these simple steps, you can ensure fair compensation, maintain a sustainable business, and set competitive rates. Your time and expertise are valuable—price them accordingly to reflect your quality and professionalism.
Materio’s time tracking system, ability to itemize time down to an item within the scope, ease of setting billable and cost rates, and integrated invoicing make it a breeze to track and bill time accurately.
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