Introduction

This page explains key financial terms and calculations for project management, including External Rate/Hour (ERPH), Internal Rate/Hour (IRPH), Departmental Loading, and the distinctions between Gross and Net Profit. It details how these metrics are used to estimate labor costs, manage project finances, and assess overall profitability. Additionally, it provides practical examples and calculations to illustrate these concepts. Using Integro, you can accurately calculate Gross Profit and manage financial aspects of your projects effectively.

External Rate/Hour (ERPH)

The external rate/hour (or charge-out rate) is the rate you charge your customers for each hour you work for them. On fixed-cost projects, this figure is used in a proposal to calculate the overall labour element of the quote. In a time and materials project, this calculates what you need to bill the customer for any labour carried out.

Internal Rate/Hour (IRPH)

The internal rate/hour is a fixed hourly rate applied to the work each employee carries out on behalf of the company. This rate is multiplied by the number of hours worked on a project by each employee to determine the overall labour cost to the company. You edit the rates in the Financial section of the employee’s record.

Departmental Loading

The department loading is a fixed cost for each hour (excluding overtime) an employee works. It is calculated by determining the company's fixed annual costs (excluding direct labour) and dividing that figure by the estimated total direct labour hours that will be worked that year.  You can update this figure at any stage during the year, and it will apply to any hours recorded after the change.

Gross versus Net Profit

Gross and Net profit are two distinct metrics used to assess the company's profit or loss.

Gross Profit

Gross profit is the revenue from goods sold or services provided minus the cost of goods sold (COGS). In an engineering company, COGS could include direct costs like raw materials, labour directly involved in providing a service or creating a product, and the overhead costs directly associated with the production process.

Calculation: Gross Profit = Revenue - Cost of Goods Sold.

Purpose: It measures the efficiency of production and the margin obtained purely from the production and direct service delivery process before considering the company's broader costs.

Net Profit

Net profit is what remains from revenue after all expenses have been subtracted. This includes operating expenses, interest, taxes, and any other expenses. For an engineering firm, this might include administrative salaries, marketing, rent, utilities, equipment depreciation, interest on loans, and taxes.

Calculation: Net Profit = Revenue - COGS - Operating Expenses - Interest - Taxes.

Purpose: It shows a company's overall profitability and indicates its ability to manage all aspects of its business effectively, not just the production or service delivery.

In essence, while gross profit reflects the core business efficiency of the engineering company in producing its goods or services, net profit shows the overall profitability after all the business's financial activities are considered.

Integro assumes that you will use it to calculate your Gross Profit and determine your Net Profit using your linked accounts package; if you include all expenses in your Departmental Loading figure, then Integro will display your Net Profit. However, we do not recommend this approach as you cannot determine your Gross Profit.

Calculations

Normal Hours

(Employee’s RPH x (1 + Rate Loading)) + Departmental Loading

Overtime Rate

Employee’s RPH x (1 + Rate Loading)

Example

John’s hourly rate is 30 euros, the departmental loading is 15 euros, and his rate loading is 10%.

Hourly Rate (wage): €30.00

Rate Loading: 10%, i.e. €3.00

Departmental Loading: €15.00 (applied to non-overtime hours only)

If John works for five hours on a project, then the cost to the company is:

(€30.00 + €3.00 + €15.00) x 5 = €240.00

If John also worked an extra 2 hours overtime on that project that day, the following costs would be added:

(€36.00 + €3.60) x 2 = €79.20