Appendix A

COSTS OF PROFESSIONAL SERVICES

The cost of Professional Services is commonly expressed as a function of a Consultant's operating costs. This Appendix describes the components that comprise a Consultant's Time Billing Rate, payroll factors, example of hourly billing calculations, and a formula which can be applied for determining the costs of Professional Services.

1. TIME BILLING RATES

Time Billing Rates are comprised of three basic elements; direct payroll costs, overhead costs, and profit. For purposes of uniformity and practical use, they should be based upon actual payroll costs with a payroll multiplier factor to cover overhead and profit.

1.1 Direct Payroll Cost

This element of costs relates to the payroll and disbursements incurred by staff while engaged on an assignment which are chargeable directly to the project.

1. Daily Rate Payroll Cost

Daily payroll costs can be expressed as a per day rate. As an example, if based upon 260 working days per year:

Daily Payroll Cost = Annual Salary + Fringe Benefits
260 Days

Where: 52 weeks 5 days/week = 260 days

2. Hourly Rate Payroll Cost

Hourly payroll costs are typically expressed as an hourly rate. As an example, if based on a 37.5 hour week:

Hourly Payroll Cost = Annual Salary + Fringe Benefits
1950 hours

Where: 52 weeks/year 37.5 hours/week = 1950 hours

3. Fringe Benefits

Fringe Benefits including annual vacation and statutory holidays are typically 20% to 30% of salary. The actual cost of fringe benefits and the actual annual working days or hours should be used to calculate payroll costs. They include the employers share of:

• UIC charge*
• Workers' Compensation levies*
• Statutory holiday provisions (currently 4%)*
• Canada Pension* and Company Pension
• Vacation pay*
• Medical and Hospitalization insurance
• Life, Dental, and other insurance premiums
• Sick leave provisions and compassionate leave

* Required by Government

 

4. Disbursements

These costs are those incurred by staff engaged on an assignment and are chargeable directly to the project as described in Section 4.


1.2 Overhead Costs

This category of cost relates to the general operation and maintenance of a Professional Practice which is not chargeable directly to the project.

1. Physical Plant may include:

• office rental
• furnishings
• usual tools and equipment (excluding specialized equipment covered by negotiated rates)
• switchboard, telephones, fax, etc.
• typewriters, word processing equipment, copiers, etc.

2. Operating Costs may include:

• financing
• business and professional licenses
• professional and general business insurance
• stationery and office supplies
• technical library and periodicals
• staff recruitment and training
• audit and legal fees
• bad debts
• administrative salaries
• accountants and clerks
• receptionists
• librarians
• secretaries whose time is not directly chargeable to Client projects
• non-chargeable time by professional and technical staff in updating procedures, attending technical seminars, and other activities which are not chargeable to projects
• business development

Overhead Costs will vary according to the size of an operation, the office location, and the nature of the services provided. Some of the overhead elements may be included in negotiations as reimbursable categories. In these situations, a lower payroll factor could be negotiated.

1.3 Profit

Profit is the balance, after direct costs and overhead costs are deducted from the total revenue, prior to the payment of taxes, dividends and bonuses.

Clients should expect to pay fees that provide a profit to Consultants in return for competent and efficient services from these Consultants.

The level of profit on a specific project would reflect a Consultant's technical and management skills, efficiency, and exposure to risk for that project. Recovery of this profit would be incorporated in the Payroll Multiplier Factor, so described in Section 2 of Appendix A.

2. PAYROLL FACTOR

A payroll multiplier is the means by which overhead costs and profit are recovered from billing. This factor will vary according to the conditions which affect the efficiency of an organization or which affect the overhead costs directly.

Typically, Overhead and Operating Costs are approximately equal to Payroll Costs (Salary + Fringe Benefits) incurred by staff engaged on an assignment.

Based upon cost records for projects with varying manhours, APEGGA believes a Payroll Multiplier Factor of 2.0 to 2.5 is required to sustain a mature and competent consulting practice. In circumstances where some of the overhead items are provided by the Client or where contract employees are utilized, the Payroll Factor should be negotiated to account for potentially reduced overhead costs.

3. EXAMPLE HOURLY RATE CALCULATIONS

(Based on selected annual salaries and assumed annual working hours and fringe benefits)

 

Position

**

Annual
Salary
($/yr)

***

Hourly
Payroll
Cost
($/hr)

Hourly Billing Rate
at Payroll Cost Factors:

*

Responsibility Level

Typical
Title

Typical
Experience

2.0

($/hr)

2.5

($/hr)

B

Junior
Geologist/
Geophysicist

2-5 yrs

46,800
to
48,300

30
to
31

60
to
61

75
to
77

C

Geologist/
Geophysicist

4-10 yrs

57,360
to
60,700

37
to
39

73
to
77

92
to
97

D,E

Senior
Geologist/
Geophysicist

10 + yrs

72,792
to
90,600

46
to
58

93
to
116

116
to
145

 

Principal

****

Hourly billing rates will vary according to this individual's qualifications and level of experience. They should reflect the additional responsibility the Principal carries.

* Abstracted from APEGGA publication titled "Value of Professional Services".

** Abstracted from APEGGA publication titled "Industry Salary Survey June 1997" using the salary range for each responsibility level. For 1996 and subsequent years, reference should be made to current publications.

*** Hourly Payroll Cost = Annual Salary + 25% Fringe Benefits
1950 hours per year

**** Principal is defined as a Professional Geologist or Geophysicist who undertakes to provide responsible direction, both technically and organizationally, to the professional practice performed by a Consultant and who represents that professional practice to Clients.

 

4. FORMULA

Eg. Calculating and Tabulating the Total Cost of Professional Services on a Unit Time Basis

TOTAL COST OF PROFESSIONAL SERVICES = CONSULTANT FEE (UNIT TIME BILLING RATES TIME EXPENDED) + DISBURSEMENTS (DISBURSEMENTS x FACTOR)

Where:

Unit Time Billing Rate Hourly or Daily Payroll Cost Payroll Factor
(The payroll cost may be calculated for each individual employee engaged on a project or rates may be established for each of the various employee classifications.)
Time Expended The actual number of days or hours that each member of the project staff expends on the project.
Disbursements Reimbursable expenses incurred on the project (See Section 4)
Disbursement Factor Typically 1.10 but subject to negotiation for special circumstances and conditions.
Eg. Calculating and Tabulating the Total Cost of Professional Sevices on a Fixed Fee Basis
TOTAL COST OF PROFESSIONAL SERVICES = CONSULTANT FEE (ESTMATED PROJECT COST, EXCLUDING CONSULTANT'S FEE x FACTOR) + DISBURSEMENTS (DISBURSEMENTS X FACTOR)

 

Where: The Estimated Project Cost Factor depends on several circumstances and conditions, including:
a) How much time the Consultant Principals must spend on supervision of the project, assuming their time is not directly chargeable to the project,
b) The amount of time required for secretarial, accounting, administrative staff, or other professional or technical staff whose time is not directly chargeable to the project,