Design studio economics: how to count the money

A studio sells projects to clients and pays people for hours. The whole economics sits in the gap between those two numbers. Here's how to see it and what to do about it.

If you work alone, you want the rate calculator. If you run a studio, it works differently, and it takes six steps.

Step 1. What a person's hour costs

Take everything a person costs the studio per month: salary, plus the taxes and contributions on it. Divide by the month's working hours.

Example: a specialist costs €3,500 a month, there are 160 working hours in a month — an hour costs €21.88. That's a cost, not a price for the client.

Step 2. What a studio hour costs

Now add everything paid regardless of projects: rent, software, accounting. And divide not by all hours, but by the ones that went into projects.

People don't spend all 160 hours on projects. Part goes on pitches, hiring, internal work, holidays and the gaps between projects. Say 60% of the time goes into projects.

Example: 5 people at €3,500 plus €3,500 of overhead — €21,000 a month. Divide by all 800 hours and a studio hour costs €26.25. Divide by the 480 hours that really went into projects and it's €43.75.

The difference of €17.50 on every project hour is the quiet loss: money for time nobody bought.

Step 3. The multiple on cost

A handy measure for a studio: project price ÷ what the people's hours on that project cost. One number instead of arguments about rates.

In the example, people's project hours cost €10,500 a month (480 hours at €21.88). The studio's costs are €21,000. So at a multiple of 2 the studio breaks exactly even, even though every project hour is paid by clients.

Anything above that is profit and cushion. At a multiple of 3, revenue is €31,500 and €10,500 is left. At 2.2, only €2,100 is left.

In this example, two isn't a goal — it's the zero mark. The goal starts where empty hours, overhead and profit tax are all covered.

Step 4. The project price

Estimate people's hours by role, multiply by what their hour costs, multiply by the target multiple.

Example: a 300-hour team project costs the studio €6,563. At a multiple of 3 the price is €19,688. The same €13,125 is a multiple of 2: the project covered its hours and earned nothing.

The client doesn't need the hours. They need the result and clear limits: what's included and how many rounds of revisions.

Step 5. Actuals against the estimate

An estimate is a guess. The real money shows up afterwards: hours per person and project, and the multiple for each project. Not the one you planned, but the one you got.

Studios usually lose in three places:

• revisions beyond the agreed rounds;
• layers of approvals on the client's side;
• work nobody logged: calls, emails, «sat for half an hour thinking».

The first two show up in hours, if hours are logged. The third only shows up if hours are logged right away. How to get there — see how to get a studio to log hours.

Step 6. How to reach the target

When the multiple falls short, the way out is always one of two: a higher price or a tighter deadline. Don't touch quality: it comes back in the next project.

One thing helps: the numbers are visible to more than the owner. When a producer knows how much the studio has to earn, it's easier to name a bigger price to a client. When a designer sees where the project stands against the estimate, it's easier to say in time, «this is out of scope now».

Common questions

What multiple should I aim for?

Start from your own zero mark: studio costs ÷ cost of project hours, as in step 3. Aim above it with room for profit tax and growth. The smaller the share of hours in projects, the higher the zero mark.

What if people are on salary, not a rate?

The calculation is the same. Salary plus taxes is the cost of a person's hour. A client rate is only needed as a check on the project price.

Should clients see the hours?

Not necessarily. A studio sells a result; you need the hours for yourselves, to check the estimate against what happened.

Where to count it

In the Bureau, every member can have their own cost and client rate. Partner margin and the breakdown of «who logged how many hours at what rate» live there too. Project hours come from the journal. The rules are in money in a team.

Next: how to get a studio to log hours, money in a team and all the guides.