Costing an IT Services Firm: Cost per Billable Hour, Pyramid Mix and Account Margin
Your full cost per billable hour is loaded cost divided by the hours actually billed. Most firms have never calculated it, and fewer still by grade.
Summary
- Grade by grade, one figure runs an IT services firm: full cost per billable hour, meaning loaded cost spread over only the hours that reach an invoice.
- A fixed-price project quoted on one pyramid and delivered on a more senior one loses margin with nobody making a mistake. In the example below, the same 1,000 hours cost ₹3,50,000 more and margin falls from 40% to 26%.
- Delivery location does the same to a blended rate, and account margin can be negative on an account whose projects all look healthy.
- Build six numbers in order, ending with project margin on hours and mix, then account margin.
A services business sells capacity. You buy people by the month and sell them by the hour, and the difference between those two numbers is the business.
So the model rests on one figure almost nobody tracks properly: what one billable hour actually costs you. Not cost per employee. Cost per billable hour, by grade.
Full cost per billable hour, grade by grade
Full cost per billable hour = loaded cost ÷ hours actually billed
Both halves are usually wrong the first time a firm calculates them. Loaded cost is not salary: add PF, gratuity provision, ESI where applicable, insurance, bonus, laptop and software, and workspace. Then add the person's share of delivery management, HR, recruitment and L&D. Hours billed are not hours available: from roughly 2,000 working hours a year, subtract leave, holidays, bench between projects, internal work, training, pre-sales support and unbilled overrun. A firm that believes it runs at 80% is frequently closer to 55-60% on hours actually billed.
Together the two corrections can more than double the hourly cost; what one unit costs takes a single engineer through both. Do it by grade, because a firm-wide average cannot price a project whose mix differs from the firm's.
This is the full cost of an hour, overhead included, not the contribution floor in gross margin vs contribution margin, which counts only costs that vary with the work. One says whether the firm earns its ; the other, how far one deal can bend.
Six reasons an hour goes unbilled, and who owns each
One utilisation number hides which part of unbilled time is costing you; each part has its own owner.
Where unbilled hours go, and who can fix each
| Component | Who owns it | Typical fix |
|---|---|---|
| Bench between projects | Resourcing and sales pipeline | Better forecasting, staggered roll-offs |
| Leave and holidays | Nobody: it is a given | Build it into the standard |
| Internal projects | Leadership | Decide deliberately; do not let it drift |
| Training and L&D | Capability plan | Budget it visibly rather than absorbing it |
| Pre-sales and pursuit support | Sales | Log hours and win rate by pursuit type |
| Unbilled overrun | Delivery and estimation | The most actionable of the six |
Pursuit time is the row almost nobody apportions; pricing a services business shows what a low win rate loads onto every account you do win.
Pyramid mix decides what an hour costs
Cost per hour depends on who delivers the work. One senior to four juniors costs very differently from two seniors to one junior. A fixed-price quote built on one pyramid and delivered on another loses money without anyone making a mistake.
Take a 1,000-hour fixed-price project sold at ₹25 lakh. Full cost per billable hour is ₹3,000 senior, ₹2,000 mid and ₹1,000 junior. They come from ₹36 lakh, ₹24 lakh and ₹12 lakh loaded, each over 1,200 billed hours a year (60% of 2,000). The quote assumed a junior-heavy team; delivery used a more senior one, on exactly the hours quoted.
One fixed-price project: the same 1,000 hours, quoted on one pyramid and delivered on another
| Grade | Cost per billable hour (₹) | Quoted hours | Quoted cost (₹) | Delivered hours | Delivered cost (₹) |
|---|---|---|---|---|---|
| Senior | 3,000 | 100 | 3,00,000 | 250 | 7,50,000 |
| Mid | 2,000 | 300 | 6,00,000 | 350 | 7,00,000 |
| Junior | 1,000 | 600 | 6,00,000 | 400 | 4,00,000 |
| Total cost | 1,000 | 15,00,000 | 1,000 | 18,50,000 | |
| Fixed price | 25,00,000 | 25,00,000 | |||
| Margin | 10,00,000 (40%) | 6,50,000 (26%) |
Nobody overran. But 150 junior hours went to seniors at ₹2,000 more each (150 × ₹2,000 = ₹3,00,000). Another 50 went to mid-level engineers at ₹1,000 more (₹50,000). That is ₹3,50,000 and fourteen points of margin, on a project the hours report shows on budget.
A project that came in on hours but with heavier seniority has eaten margin invisibly.
- Quote the pyramid, not just the hours. If delivery differs from the stated mix, that is a variance worth examining.
- Track actual against estimated mix on every project, costed at grade rates, while it is still running.
- Watch the firm-level pyramid. A firm that turns top-heavy, as seniors stay and juniors , sees cost per hour drift up for years with no single decision causing it.
Onshore, offshore and the blended rate
Across locations, a blended cost hides as much as a blended margin. Cost per hour differs enormously by location, and utilisation often does too. So a blended rate quoted to a client and a blended cost used internally are both wrong for any specific engagement.
Suppose an onshore hour costs three times an offshore one. At 20% onshore hours the blended cost is 1.4 times the offshore cost per hour (0.8 × 1 + 0.2 × 3). If the client pulls work onshore after signing and the split becomes 30%, it is 1.6 (0.7 × 1 + 0.3 × 3). That is about 14% more per hour on an unchanged price.
Cost by delivery location, quote by delivery mix, and record an onshore shift after signature as the margin event it is.
Project margin, account margin, and why they disagree
Project margin is revenue minus delivery cost for one engagement, on the hours and mix actually used. Useful, and incomplete. Account margin adds everything the relationship consumes outside the projects: governance meetings, account management, unbilled advisory, the partner who takes their calls, travel, and the cost of their payment behaviour.
A client with three healthy projects and a demanding governance model can be a loss-making account, visible only at account level. Ranking clients this way is the services form of cost to serve.
Fixed price: contingency from your own overrun history
Time and materials passes overrun risk to the client, protecting margin and capping upside. Fixed price keeps both: deliver efficiently and you keep the gain, overrun and you absorb it.
Price on the pyramid and the hours you will actually use. Set contingency from your historical overrun, which you know only if you track planned against actual on every project. Tight scope is the other half; the services pricing piece covers revision rounds and change orders.
Six numbers, built in the order they depend on each other
- Loaded cost per person, by grade.
- Utilisation per person, per month, with the six components separated.
- Full cost per billable hour, by grade and blended.
- Effective rate against rate card, by client. Effective rate is what you invoiced a client divided by every hour your people worked for that client, billed or not, so discounts, write-downs and unbilled overrun all show. It is not the realised rate in your rate card is not your price, which spreads the rate card over every available hour, bench and leave included.
- Project margin, planned against actual, on hours and mix. Hours alone would have passed the project above; record the quoted and delivered pyramids and cost both at step three's rates.
- Account margin: project margins less governance, account management, unbilled advisory, travel and the financing cost of how the client pays. Have it before every renewal.
Steps one to three take an afternoon, and step four a day with your invoicing data. Five and six take a quarter of discipline, since the delivered mix is captured as each project closes.
Check five fixed-price projects against their quoted mix
This week, calculate full cost per billable hour for each grade. Then take your last five fixed-price projects and set the quoted pyramid beside the delivered one, both costed at those rates. The gap is margin that left without anyone signing it off.
Our Pricing Maturity Assessment reads your cost structure alongside the rest of your pricing.
Frequently asked questions
How do you calculate cost per billable hour?
Divide a person's loaded cost for the year by the hours they actually billed, grade by grade. A firm at 60% billed utilisation spreads the same cost over 1,200 hours, not 2,000.
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