Average Cost-Per-Hour (ACPH) is a financial metric that represents the average cost of an hour of labor in a given segment of the business.
It only includes the fully loaded cost of employment for the segment being measured, including benefits, and other alternative forms of compensation. This metric is essential for evaluating the cost of service delivery and assessing pricing in a way that is horizontally consistent and accurate.
Formula:
ACPH = Fully Loaded Payroll / Gross Capacity
By understanding ACPH, agencies can compare it against their Average Billable Rate (ABR) to determine whether their pricing and delivery efficiency is setting them up for strong enough margins.
As a general rule of thumb, agencies should target a 70%+ margin on their Average Billable Rate relative to their ACPH. In other words, their ABR should be at least 3x their ACPH.
Why it matters for agencies
Knowing your ACPH is essential to managing margins and pricing services appropriately. It enables leaders to track profitability more accurately and make informed decisions about staffing, pricing, and service delivery.
Here’s why ACPH matters:
- Measures service delivery costs: Clarifies how much is being spent to earn revenue across a given segment of the business (clients, projects, services, products, departments, etc) for any given period of time.
- Supports margin tracking: Allows comparison with ABR to ensure healthy Direct Delivery Margins. Importantly, because ACPH does not fluctuate based on Utilization and Overhead Costs, it is more accurate and horizontally consistent, meaning that margins can actually be compared from one time period to another.
- Improves pricing decisions: Informs whether rates are high enough to cover costs.
- Highlights team structure efficiency: Helps compare average cost of labor across various clients, projects, products, services, deptarments, etc. and find opportunities to become more efficient.
- Assists in scenario planning: Useful for modeling different hiring or resourcing strategies.
How to optimize
Improving ACPH doesn’t necessarily mean reducing pay—it’s about managing team structure and resourcing to ensure the right people are doing the right work. Here are a few strategies:
- Review team mix: Balance senior and junior team members to optimize cost-efficiency.
- Standardize processes: Reduce the judgement required to deliver consistent and high quality outputs, thereby reducing the experience required to do the work. This generally enables lower cost staff to take on more work and displaces it from more expensive staff.
- Invest in the right tools: Use software that supports automation and efficient collaboration, enabling lower cost staff to take on a larger proportion of the work.
- Stay on top of resourcing: Avoid assigning work that could be done by less expensive staff to more expensive resources whenever possible.
The lower your ACPH (without sacrificing quality), the easier it is to achieve a healthy profit margin when pricing work at market rates.