The $100/Hour Illusion
Every business has a number in its head. "We charge $100 an hour." That's the target rate—the price you believe represents your value.
But the real question isn't "What do you charge?" It's "What do you actually collect per hour of work once all the time is counted?"
That's the realized rate. And it's almost always lower than the target.
The Formula
If you thought you were charging $100/hour but only collected $50/hour, half your expected profit just evaporated.
How Realized Rate Collapses
Scenario 1: Scope Creep on Fixed-Fee Work
You price a project at $5,000, estimating 50 hours of work. That's $100/hour—right on target.
But the project runs long. Changes, revisions, extra meetings. Your team ends up spending 100 hours. Client still pays $5,000.
| Metric | Expected | Actual |
|---|---|---|
| Project Price | $5,000 | $5,000 |
| Hours Worked | 50 | 100 |
| Realized Rate | $100/hr | $50/hr |
Same contract. Half the value.
Scenario 2: Low Utilization on Hourly Work
Even hourly billing isn't safe. You bill $100/hour for the hours you invoice. But if your team is only 50% utilized, half their paid time isn't generating revenue.
Your effective realized rate across all paid hours is $50/hour—even though your invoice says $100.
Scenario 3: Unbilled Time on "Included" Work
Maintenance contracts are a classic trap. "One hour per month for $150." If the tech actually spends one hour, great—$150/hr realized. But when the job runs long and they spend 7 hours?
| Hours Worked | Billed | Realized Rate |
|---|---|---|
| 1 hour | $150 | $150/hr |
| 3 hours | $150 | $50/hr |
| 7 hours | $150 | $21/hr |
The Fixed-Fee Trap
Fixed fees aren't evil. Clients love them—predictability, no surprise invoices. And they're easier to sell.
But fixed fees cap your revenue while leaving your hours uncapped. If you underestimate the work, you absorb the loss. The client is thrilled to get 7 hours of service for the price of 1. Your business is subsidizing that thrill.
The solution isn't to avoid fixed fees. It's to scope them honestly:
- Track actual time against every fixed-fee job
- Build a library of "how long things actually take"
- Price based on realistic hours, not optimistic guesses
- Include change order clauses for scope expansion
- Renegotiate contracts that consistently run over
Calculating Your Realized Rate
You can calculate realized rate at different levels:
Per Project:
Total collected for project ÷ Total hours logged to project
Shows which projects are profitable and which are bleeding
Per Client:
Total collected from client (year) ÷ Total hours worked for client (year)
Shows which client relationships are actually worth it
Per Employee:
Total revenue from employee's work ÷ Total hours paid to employee
Shows who's generating profit and who's costing you
Company-Wide:
Total revenue ÷ Total labor hours paid (all employees)
The ultimate report card—what you actually earn per hour of payroll
The Reports You Need
| Report | Where to Find It | What You're Looking For |
|---|---|---|
| Time by Project | Time tracking system | Actual hours per project vs. estimate |
| Invoice Detail | Accounting software | Amount billed per project/client |
| Project Profitability | Job costing report | Revenue minus labor cost per project |
| Payroll by Period | Payroll provider | Total hours paid per employee |
Bottom Line
- Target rate is what you aim to bill; realized rate is what you actually earn
- Scope creep, low utilization, and unbilled time all crush realized rate
- Fixed fees work only if scoped to reality
- Profitability is measured by realized rate staying above floor rate
What's Next
Now you understand the mechanics: floor rate, survival number, utilization, realized rate. But there's one more question every growing business faces: When do I hire? In Module 5, we'll look at capacity—how to know when you're actually maxed out vs. when you just need to fix utilization first.