Cost Rates and Team Member Costs

Cost rates represent the cost of labor for your team members. Understanding how cost rates work is essential for accurate profitability tracking, as profit = revenue - cost.

What are Cost Rates?

Cost rates are the hourly cost of employing a team member. This includes:

• Salary or wages
• Benefits
• Overhead allocation
• Any other costs associated with that person's time

Cost rates are used to calculate the cost side of profitability, regardless of billing type.

Setting Cost Rates

Cost rates are set at the team member level and apply to all time entries for that person.

How to Set a Cost Rate

1. Navigate to your team settings or member management
2. Select the team member you want to configure
3. Open their profile or settings
4. Enter the cost rate in the "Cost Rate" field
5. Save your changes

info

Cost rates are optional. If no cost rate is set, cost calculations will be $0, and profit will equal revenue.

Image placeholder description: A screenshot of the team member settings/profile page. The image should show:

• A form or settings page for a team member
• A "Cost Rate" field with a dollar amount input (e.g., $50/hour)
• Help text or tooltip explaining what cost rates are used for
• Save button
• Maybe a preview showing how the cost rate affects profitability calculations

How Cost Rates Work

Cost Calculation

For every time entry, cost is calculated as:

Cost = Hours Worked × Team Member Cost Rate

This applies to all time entries, regardless of:

• Whether the entry is billable or non-billable
• The client's billing type
• Whether the entry has an hourly rate

Example

A team member has a cost rate of $50/hour:

• Entry 1: 2 hours billable → Cost = 2 × $50 = $100
• Entry 2: 1 hour non-billable → Cost = 1 × $50 = $50
• Entry 3: 3 hours billable → Cost = 3 × $50 = $150

Total Cost = $100 + $50 + $150 = $300

Image placeholder description: A table or list showing cost calculations. The image should show:

• A list of time entries with columns:
  • Date/Time
  • Hours
  • Team member
  • Cost rate
  • Cost (hours × rate)
  • Billable status
• Visual indication that cost is calculated the same for billable and non-billable entries
• A summary showing total cost
• Maybe color coding or indicators for billable vs non-billable entries

Cost vs Revenue

It's important to understand that cost and revenue are calculated independently:

Revenue Sources

• Hourly Billing: Revenue = hours × hourly_rate (from project/client/member)
• Retainer Billing: Revenue = daily retainer allocation
• Hybrid Billing: Revenue = retainer base + overage

Cost Always

• All Billing Types: Cost = hours × cost_rate (from team member)

Key Insight

Even for retainer and hybrid clients where time entries have no hourly rate, those entries still contribute to costs. This ensures accurate profitability tracking.

Image placeholder description: A side-by-side comparison or diagram showing cost vs revenue. The image should show:

• Two columns or sections:
  • Revenue: Shows different calculation methods for hourly/retainer/hybrid
  • Cost: Shows consistent calculation (hours × cost rate) for all types
• Visual examples showing:
  • Hourly client: Revenue from rate, cost from cost rate
  • Retainer client: Revenue from retainer, cost from cost rate
  • Hybrid client: Revenue from retainer + overage, cost from cost rate
• Clear visual distinction between the two calculations

Cost in Daily Statistics

Cost is calculated daily in Rize's statistics models:

cost_amount = Σ(hours × cost_rate) for all entries in the day

This includes:

• Billable entries
• Non-billable entries
• Entries for hourly, retainer, and hybrid clients

Daily Cost Calculation

1. Fetch all time entries for the day
2. For each entry, calculate: hours × team_member.cost_rate
3. Sum all entry costs
4. Store in daily statistics

Image placeholder description: A screenshot of daily statistics or a report showing cost calculations. The image should show:

• A daily view with:
  • Date
  • Time entries listed
  • Cost per entry (hours × cost rate)
  • Total cost for the day
• Visual breakdown showing how each entry contributes to total cost
• Maybe a comparison with revenue and profit for the day

Profitability Calculation

Profit is calculated as:

Profit = Revenue - Cost

Where:

• Revenue = Hourly revenue + Retainer revenue
• Cost = Sum of (hours × cost_rate) for all entries

Example: Hourly Client

• Revenue: 10 hours × $150/hour = $1,500
• Cost: 10 hours × $50/hour = $500
• Profit: $1,500 - $500 = $1,000
• Profit Margin: ($1,000 ÷ $1,500) × 100 = 66.7%

Example: Retainer Client

• Revenue: $3,000/month retainer = $100/day
• Cost: 8 hours × $50/hour = $400
• Profit: $100 - $400 = -$300 (loss)
• Note: Even with retainer revenue, costs can exceed revenue if many hours are worked

Example: Hybrid Client

• Base Revenue: $2,000/month = $66.67/day
• Overage Revenue: 5 hours × $150/hour = $750
• Total Revenue: $2,750
• Cost: 25 hours × $50/hour = $1,250
• Profit: $2,750 - $1,250 = $1,500
• Profit Margin: ($1,500 ÷ $2,750) × 100 = 54.5%

Image placeholder description: A detailed profitability breakdown. The image should show:

• A profitability report or dashboard with:
  • Revenue section (broken down by source if hybrid)
  • Cost section (showing hours × cost rate)
  • Profit calculation (revenue - cost)
  • Profit margin percentage
• Visual representation (maybe a bar chart or breakdown)
• Clear labels and calculations
• Maybe color coding (green for profit, red for loss)

Cost Rate Best Practices

1. Set Realistic Cost Rates

Include all relevant costs:

• Base salary/wages
• Benefits (health insurance, retirement, etc.)
• Overhead allocation
• Training and development costs

2. Update Cost Rates Regularly

As team members get raises or benefits change, update their cost rates to maintain accuracy.

3. Consider Different Cost Rates

You may want different cost rates for:

• Different roles (senior vs junior)
• Different employment types (full-time vs contractor)
• Different cost structures

4. Use Cost Rates for Planning

Understanding your cost rates helps with:

• Pricing decisions
• Profitability forecasting
• Resource allocation
• Client profitability analysis

Cost Rate vs Hourly Rate

It's important to distinguish between cost rates and hourly rates:

Aspect	Cost Rate	Hourly Rate
Purpose	Calculate costs	Calculate revenue (hourly billing)
Set At	Team member level	Project/Client/Member level
Applies To	All time entries	Only billable entries (hourly clients)
Used For	Cost side of profit	Revenue side of profit

Key Differences

• Cost Rate: Always used for cost calculation, regardless of billing type
• Hourly Rate: Only used for revenue calculation for hourly billing clients
• Retainer/Hybrid Clients: Have no hourly rates on entries, but still have costs from cost rates

Image placeholder description: A comparison table or visual diagram. The image should show:

• A side-by-side comparison with:
  • Cost Rate column showing: Team member level, All entries, Cost calculation
  • Hourly Rate column showing: Project/Client/Member level, Billable entries only, Revenue calculation (hourly clients)
• Visual examples showing how each is used
• Clear distinction between the two concepts

Cost Allocation

For retainer and hybrid clients, costs are allocated to projects and members based on actual time worked, even though revenue comes from retainers.

This ensures accurate profitability tracking at all levels:

• Client Level: Total retainer revenue vs total costs
• Project Level: Allocated retainer revenue vs project costs
• Member Level: Allocated retainer revenue vs member costs

Next Steps

• Learn about Profitability Metrics to understand key financial indicators
• Explore Profitability Reports to see cost and profit in action
• Review How Revenue is Calculated to understand the revenue side