Project cost rate represents the internal cost assigned to a resource hour; billing rate is the amount charged or valued for that hour under a commercial model. Their difference is not automatically project profit because commission, overhead, non-labor costs, discounts, fixed-price effort, and shared costs may also affect margin.
In plain words
A cost rate is what an hour of someone’s time costs the firm. A billing rate is what the client is charged for it. The gap between them pays for overhead and profit. Keep them separate: cost rates are private, billing rates go on quotes.
Who this helps: Presales consultants, project managers and finance staff who set or use rates.
Questions this guide answers:
- What is the difference between a cost rate and a billing rate?
- How do you calculate a project billing rate?
- Why shouldn’t you show cost rates to clients?
What is the difference between a cost rate and a billing rate?
A cost rate converts planned or actual resource time into an internal labor-cost amount. A firm may derive it from compensation and employer costs, use a standard role rate, or apply a fuller allocated-cost policy. There is no universally correct formula: the organization must define which costs the rate includes and apply that definition consistently.
A billing rate is commercial. It converts billable time into client revenue when the contract is time based, or it can be used as a reference during pricing. HMRC's service-pricing guidance notes that price may be influenced by cost, the nature of the service, available alternatives, customer benefit, market conditions, and the parties' financial positions. Cost informs a price; it does not uniquely determine it.
| Question | Cost rate | Billing rate |
|---|---|---|
| What does it represent? | Internal cost assigned to resource time | Client charge or commercial value per unit of time |
| Typical owner | Finance or an authorized administrator | Commercial, finance, or pricing owner |
| Common use | Estimate and measure labor cost | Price time-based work or test a commercial position |
| Visibility | Usually restricted because it can reveal sensitive assumptions | May be visible to sales, clients, or delivery under policy |
For example, a firm might choose to include salary, employer on-costs, and an allowance for non-productive time in a cost rate. The Local Government Association's fee-calculator guidance describes those components as relevant when calculating a true hourly staff cost, while noting that local circumstances differ. Another firm might keep overhead outside the labor rate and apply it separately. Both can work if the boundary is explicit and double counting is prevented.
Example: the same consultant under two commercial models
Assume a consultant has a governed cost rate of $55 per hour and a standard billing rate of $120 per hour. These figures are illustrative, not market benchmarks.
| Measure | Time-and-materials example | Fixed-price example |
|---|---|---|
| Commercial basis | 100 billed hours at $120 | $18,000 agreed project price |
| Revenue | $12,000 | $18,000 |
| Planned labor | 100 hours at $55 = $5,500 | 100 hours at $55 = $5,500 |
| Amount before other included costs | $6,500 | $12,500 |
In the time-and-materials example, the $65 hourly spread produces $6,500 before commission, overhead, non-labor cost, write-offs, and other included items. It should not be labelled final project profit.
In the fixed-price example, the billing rate does not calculate contracted revenue: the $18,000 deal price does. If actual effort becomes 140 hours, labor cost rises to $7,700 and the amount before other included costs falls to $10,300, even though the standard billing rate never changed. This is why a fixed-price review needs approved effort and actual effort, not only a rate-card spread.
Scenario: a client asks what your hourly rates are
This question reaches an account manager sooner or later, and the answer depends on which rate is meant.
- The account manager does not answer from the sheet. She asks the presales lead which rate card is approved for client use.
- The presales lead gives the billing rate for the role (for example USD 120 an hour for a consultant). That is the price of an hour.
- The cost rate (for example USD 55 an hour) is normally not shared with clients unless the contract or policy requires it (open-book and cost-plus agreements may). It reveals what people cost and, with the billing rate, the margin.
- If the client has a negotiated rate, finance confirms it is recorded as an exception, so quotes and invoices use the same number.
If the account manager had quoted USD 55 because it was the number in the estimate, the firm would have sold every hour at cost and earned nothing towards overhead or profit. A short label next to each rate in the sheet (“cost, internal” and “billing, client”) is the cheapest way to prevent that.
What should a rate policy say?
- Define the unit. State whether the rate is hourly, daily, weekly, or another unit and how conversions are handled.
- Define included cost. Document whether employer costs, non-productive time, overhead, contractor cost, or other items are inside or outside the cost rate.
- Separate the two fields. A cost-rate change should not silently alter the client billing rate, or vice versa.
- Use effective dates. Preserve the assumption that supported an approved estimate instead of rewriting history.
- Control access. Limit sensitive internal rates while giving each role the information needed for its decision.
- Document exceptions. Record negotiated discounts (see how discounts affect project margin for the mechanics), project-specific rates, and manual overrides with an owner.
The UK government's service-costing guidance recommends transparent allocation methods, consistent application, validation, and version control. Those controls are useful beyond government: without them, two teams can call a number a "cost rate" while including different cost categories.
How does Managed Margin use cost and billing rates?
Resource profiles carry a planning rate: finance’s standard hourly cost for a designation, seniority, specialization and location, used to cost pricing strategies. In delivery, a person’s actual hourly cost is used when it is recorded, and it is protected by its own permission, so sales can see margin without seeing pay rates. Client billing rates are kept separately, for the whole project or one service order, with dated ranges that may not overlap.
For fixed-price planning and the full-project forecast, use the approved fee, including applicable approved commercial changes. Actual-to-date margin uses recognized revenue through the review date. T&M revenue uses approved billable hours and agreed rates. The current product supports BambooHR people/pay sync and scoped API keys; it does not track invoices, cash or receivables.
For the operating model, read the project rate card guide. For the broader workflow, see project pricing for professional services or project pricing software.
- Full Utilization Meaning: Why Busy Teams Miss Margin Targets
- How to Price a Project to a Target Margin: Formula and Example
- ROM Cost Estimate Examples for IT Projects
Real example: a finance analyst explains two rates to a new colleague
An illustrative story with invented figures, to show how the idea works in a real office.
Omar, a finance analyst, explains the difference to a new project coordinator. A consultant costs the firm USD 60 an hour, including salary, benefits and employer taxes. The firm charges clients USD 120 an hour.
On a 100-hour task the firm bills USD 12,000 and spends USD 6,000. The USD 6,000 gap pays for office costs, sales and other overhead, and the margin that is left.
The coordinator asks if she can put USD 60 on the quote to show the client how fair the price is. Omar says no: the cost rate is a private number, and the client buys the service at the billing rate.
When do you use each rate, and what comes before and after?
Both rates pass through the same hands in the same order. This is how a finance partner would walk a new teammate through it.
| Stage | Owner | Checkpoint |
|---|---|---|
| Set the cost rate | Finance | The cost boundary and the hours it is divided by are written next to the rate |
| Set the billing rate | Pricing owner or sales leadership, with finance | It is labelled list, client or project-specific, and has an effective date |
| Estimate | Presales consultant | Cost rates are used for cost and billing rates for time-and-materials revenue, never swapped |
| Quote | Presales lead and finance | The client sees the billing rate or the price; the cost rate stays internal |
| Report margin | Project manager and finance | Actual cost uses the same boundary as the planning rate, so planned and actual compare |
Cost rate vs billing rate: frequently asked questions
How are cost rate and billing rate different?
Cost is what the firm spends on the hour; billing is what it charges. The difference funds margin and unrecovered costs.
Can I show a client the cost rate?
Usually not. Show the billing rate, and share margin or ranges internally.
What is the difference between costing and rates?
Costing is working out what the whole job costs the firm: hours times cost rates, plus other costs. A rate is the amount per hour, either what an hour costs the firm (cost rate) or what the client pays for it (billing rate). Costing uses cost rates; a time-and-materials quote uses billing rates.
How do you calculate a project billing rate?
For a rate that reaches a target margin, divide the cost rate by one minus the target margin (and minus any charge that is a share of the price). For example USD 55 ÷ (1 − 0.30) = USD 78.57 an hour, before overhead and non-billable time. Check it against the rate card and the market before using it.
Continue the sequence: guides to read next
- What Is a Project Rate Card? How to Build One: organising both rates in a card
- How to Share Project Margin With Sales Without Showing Salaries: keeping cost rates private
Sources and methodology
- UK Government, Service Costing in Government. Used for transparent allocation, validation, consistency, and version-control principles.
- Local Government Association, Fee calculator guidance. Used for examples of components that can inform true hourly staff cost.
- HM Revenue & Customs, Pricing of services. Used for factors that can influence a service price.
- The worked example is original. Product claims were reviewed against the current Managed Margin application on 26 September 2026.