You’re generating revenue. But do you know what an hour actually costs?
The project is underway. The hours are being logged. The invoice goes out. And yet, at the end of the year, the profit is still lower than expected - even though the office was never empty. What many business owners do in this situation: they look at the turnover. What they rarely do: they work out what an hour actually costs them. It is precisely this gap that is the problem. This article explains how the cost price factor arises, why the internally calculated hourly rate is almost always too low - and what you can do immediately to change that.
Turnover is not an indication of profitability
A design practice can win projects, invoice fees and still systematically earn too little. That sounds paradoxical, but it can be explained structurally. A staggering three-quarters of architectural practice owners do not know their practice’s overheads factor - and even when they do, only one in two applies it when calculating fees. This means that the majority of firms calculate quotations based on gut feeling or a market comparison - not on the basis of their own costs.
The result is not an isolated case, but a pattern. Anyone who does not derive their hourly rate from actual costs awards fees that may appear competitive, but which cost the firm money month after month. Not visible as a negative bank balance - visible as a lack of reserves, as an insufficient owner’s salary, as investments that are repeatedly postponed.
What an hour really costs - and why the simple calculation is wrong
The obvious formula is: annual costs divided by annual hours equals hourly rate. Sounds logical. But it is wrong - or at least incomplete. It is not enough simply to add up the expenses and divide them by the hours worked. After all, architects and engineers cannot bill their clients for every single hour worked: ‘unproductive’ tasks such as client acquisition, office administration or internal management account for an average of around 35 per cent of a design practice’s total working time.
In concrete terms, this means that of a person’s 1,800 annual working hours, on average only around 1,170 are actually billable. The remaining 630 hours are still worked - they just aren’t paid for. Non-billable hours therefore have a significant impact on the hourly rate - regardless of whether this rate can be charged to external clients, you should factor it into your internal calculations.
Added to this is the overhead factor - also known as the office cost factor. For a quick estimate, all staff costs plus the owner’s salary can be multiplied by an office cost factor. This factor includes all expenses such as premises costs, insurance, vehicles, advertising and travel costs, maintenance, depreciation, leasing, interest and imputed costs - and averages 1.5 (range 1.2 to 2.0). The AHO sets the overhead factor at an average of 2.7.
The formula describing standard practice is therefore:
Gross salary × Overhead factor ÷ Project hours + 10 to 15% for risk and profit = Hourly rate
Anyone who skips this step and instead looks at what competitors charge is basing their price on others’ costs - not their own.
What the market recommends - and what that means for you
There are guideline figures. The Bavarian Ministry of Construction most recently published the following guideline figures (net) in July 2023: contractors 121 euros per hour, staff 86 euros per hour, other staff 64 euros per hour. However, these figures have a crucial weakness: Significantly higher adjustments than the proposed 10 to 20 per cent of the previously valid hourly rates will be necessary to run an architectural practice profitably.
Although associations and professional bodies occasionally publish guidelines, these do not necessarily apply to one’s own practice. The correct hourly rate varies greatly, depending on the size, specialisation and cost structure of the design practice. In other words: anyone who sets a rate of 86 euros simply because the association recommends 86 euros has not done the maths - they have merely made a comparison.
An example illustrates the implications: With an owner’s salary of 75,000 euros, an office cost factor of 1.5 and 1,320 billable hours, the owner’s hourly rate would be 85 euros. If the billable proportion falls to 60 per cent, only 1,056 billable hours remain - the owner’s hourly rate rises to approximately 107 euros per hour. A difference of €22 per hour - which has not arisen from market comparisons, but from an honest assessment of costs.
The cost items missing from the hourly rate
Typical errors in calculation include: Neglecting imputed costs, no surcharges for risk and profit, no imputed value for fixed assets already written off, missing imputed interest on fixed assets and reserves, missing or insufficient owner’s remuneration, no provision for capital repayment.
None of these items is a luxury, but rather an operational necessity. Anyone who does not include their own director’s remuneration as a cost item is effectively subsidising every contract with unpaid working hours. Anyone who does not factor in risk premiums is assuming the project risk free of charge. As design offices are service providers, the majority of their expenditure consists of staff costs - on average a full three-quarters of total office expenditure. However, the hourly rate must also cover the remaining quarter - in particular overheads ranging from office rent to the necessary insurance.
An inadequately calculated target annual turnover presents misleading figures - particularly when determining hourly rates. The design consultancy then sees turnover but no profit. Capacity utilisation, but no return.
What the cost price factor has to do with throughput
There is a second level that is almost never mentioned in fee discussions: not every billable hour is actually invoiced. Projects run over budget. Corrections are quietly accepted. Services are provided that were not included in the fee. Architects and engineers can better assess their external hourly rates if they know their internal hourly rate. The average office hourly rate is an indispensable indicator of financial health in design firms.
The cost price factor therefore answers two questions at once: What does an hour cost - and how much of that comes back? Those who know only the first question know what they should be charging. Those who also know the second question know what they actually earn. The full costs of a team are often in the region of €10,000 to €12,000 per employee per month. The monthly comparison between target and actual figures therefore ensures project success and liquidity.
In many offices, it is precisely this comparison that is missing. Not because nobody can do the maths - but because nobody knows where the hours actually go. Project times are recorded incompletely. Rework does not appear as a separate item. Meetings, coordination loops and rounds of corrections disappear into the overall capacity.
The first concrete step
Before you negotiate your next hourly rate or write your next quote: work out what an hour really costs in your office. Not as a market comparison. As your own calculation - including your salary, your overheads, your actual project quota, and an honest risk premium.
If you find that your projects are running, your hours are full, but the figures don’t add up in the end - then this is usually not down to the hourly rate alone. It’s because work is stuck in places that don’t appear in any calculation. This is exactly what Scaled Innovation reveals in 10 working days: where capacity is being lost, which hours aren’t coming back - and which changes will first generate more predictable, deliverable results. If you want to find this out for your office, this is the right next step.