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Hourly Charge-Out Rate
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The way charge-out rates are calculated varies for different countries and organizations It also depends on whether the development organization is selling its development services or building the software as an internal asset for its own organization The next two sections describe how to calculate internal project and external project charge-out rates
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Your internal accounts department should be able to provide the internal charge-out rate for each project team member The charge-out rate is the direct labor cost, that is, the cost of the employee to the organization This is usually calculated using the employee s hourly pay rate plus on-costs On-costs are all non-salary employee costs Typically, these include such overheads as payments for sick leave, recreational leave, public holiday, superannuation, insurance, fringe benefits, payroll tax, and so forth On-costs vary from country to country and in different employment situations They may add as much as 15 40 percent to the hourly rate paid to the employee On-costs plus the annual hourly rate paid for hours worked make up the employee s salary package For example: If the hourly pay rate is $40 an hour, then on-costs could vary between $6 and $15 Therefore, the internal charge-out rate for that employee could be from $46 to $56 an hour depending on the employee s employment/contract benefits
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Where an organization sells software development services, the rates that it charges the customer (charge-out rates) need to cover the cost of the employee, plus a profit margin Charge-out rates are calculated taking into account: The utilization rate of the staff, that is, the number of revenue earning days compared to the total number of days they are paid The company overheads (equipment, telephones, utilities, rent, office and administration costs, insurance, and so on) This also applies in many organizations that are not commercial software development companies, but where IT services are treated as a cost center and where internal projects include company overheads in the project costs Total employee salary package costs Profit margin required As a rule of thumb the external charge-out rate is 25 to 3 times the employee s hourly pay rate, but may be up to 6 times for larger corporations
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For example: if the hourly pay rate paid to the supplier organization s employee is $40 an hour, then the rate charged by the supplier to the client, for that employee s time spent on the project, could be between $120 to $240 per hour
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Refining Hourly Charge-Out Rate for Project Team Structure
The size and structure of the project team, and the individual roles required for the project, will depend on many factors, including the size of the project, type of project, project risk factors, type of organization, and the maturity and rigor of the development process There may be up to a fourfold difference in the rates charged for personnel performing the different roles, and the number of people performing each role will vary from project to project To estimate total cost for a project, you first need to determine the likely project team structure (number of people performing each role) and their respective charge-out rates For internal projects this is straightforward To determine the charge-out rate for external projects, you may need to reference industry sources such as job advertising sites on the Internet, IT industry surveys, and government web sites, or you can simply ask your suppliers Total effort hours for the project are calculated from the project delivery rate (PDR), therefore it is important to try to assign the projected effort hours across the different project roles in order to more accurately predict costs Figure 15-1 shows the percentage breakdown of effort of the various project roles for an in-house, new development project The ISBSG provides similar charts for enhancements and outsourced new developments in the subscriber section of its web site Use an appropriate role ratio breakdown for your particular software development, and then apply your charge-out rates to the different roles
Project Manager 7% Business Analyst 3% Software Architect 9%
Other 15% QA, Testers 16%
UI, Graphics 2%
Programmers 48%
Figure 15-1
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