Have you ever heard the term “fully burdened rate” and wondered what it meant? Let’s look at hourly billing rates and see what should be included — along with what’s too often left out.

You know what you pay your employees and yourself. But those amounts don’t constitute the full cost of doing business. In many cases, they don’t come close.

When you started your business, perhaps you expected you’d make little or no money at first, but employees had to be paid. You investigated what people doing similar work to you and your employees were earning and used those amounts as a baseline.

As your business grew, however, you encountered bid opportunities that required you to provide your fully burdened cost for each labor category. What does that mean?

People evaluating your cost proposal don’t usually want to see your expenses for accounting, information technology, rent, utilities and other costs. But they could want to know what fringe benefits you pay and what other costs you have to keep your business running beyond wages.

Analyze those costs and allocate them on an equitable basis against the wages for each employee or labor category.

Payments required by federal, state or local laws don’t count as fringe benefit contributions. These expenses are generally allocated as general and administrative (G&A) costs when determining fully burdened hourly rates.

Here’s a theoretical example to show the difference between the hourly rate and full cost for an employee.

For an employee earning $30 an hour, the share of fringe benefits allocated might be $10 an hour. Add another $16 for G&A and $4 for profit. When you add those numbers, the sum reflects a true cost of $60 an hour. In other words, the cost component for employees or labor categories is double the actual wages you pay.

Note: These are the rate calculations your contractors and consultant should make when they give you an hourly, daily or other rates.

Adding in all these costs means the true hourly rate for that consultant is not $60 an hour, but rather somewhere between $90 and $150 an hour, depending on their overhead costs as shown on the table.

Don’t be tempted to “do the math” and peg the contractor or consultant at the hourly rate you’d pay them if they were your employees. Remember all the overhead they must cover.

So what does all this mean to you and your business?

Put simply, if you include just the actual hourly rate for the people or labor categories you propose, you’ll lose lots of money if you receive the contract.