What costs are included in an FTE rate?

The analysis you are doing is pretty interesting. I have done it before to justify a Management Services Fee. I was part of the team that outsourced admin services to 30 joint ventures. My approach was as follows -

You are looking at three separate pieces to quantify -

-Employment costs - This piece is actually the easiest piece and includes all of the elements you described above, i.e. payments received by the employee and payments made on behalf of the employee. You can always add tools used specifically by the employee;

-General & Administration - This part includes rent, postage, supplies, i.e. all of your non-personnel expenses; and,

-Support Functions - Those services that every company maintains that are required, but are expenses, i.e. HR, Compliance, Accounting, IT, Marketing... These expenses are a sub-set of both personnel and non-personnel expenses.

Let's say for an example that Employment Costs were $300, G&A was $75, and Support was $75. If I had three employees my cost per employee would be $150. Next you add your required return. Let's say 20%. The employee rate should be $180.00.

My example is extremely simple, as your employee costs will vary greatly person to person. Your G&A may vary based on job function and branch location. There are support services you may feel should not be included. You can very much take this analysis down to a very detailed level, which is what I recommend. The more detailed the better.

In a Management Fee the person that will use your service is essentially requesting a fixed fee, i.e. a risk transfer to the vendor (you). If you set the rate today, and in six months provide salary increases, your margins will compress.

In my situation, I then added tiering. The more activity resulted in a lower management fee. This incentive works well if your initial calculations are correct.

Good luck.

Shoot me an e-mail if I could assist further.

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Like Regis said, the fee may vary greatly from person to person, and all the risk is transferred to you, so it is very important you don't underestimate any of the costs, especially if the rate you're going to come up with is agreed upon in a yearly contract.

Furthermore, don't be shy with the margin you want to reserve for yourself, as it will shrink very quickly if anything happens you didn't think of -- like the salary increase Regis mentions, or the person leaves and you need to replace her with a more expensive resource, or some additional tools are needed for the job.

Once you come up with what you think is a decent rate that will bring a good return to your company, check the rates of similar services offered by professional companies in your area. If you are too low or too high, you may want to recheck everything and maybe adjust your margin.

Also, depending on the scope of the project, you might want to spell everything out in the contract. For example, if your resource is going to dedicate 100% of her time to that customer, they will be expecting a minimum of 40 hours per week from her. But what happens if there is some overtime needed, or if your resource is taking some paid time off? If the customer doesn't want to hear about it, and you cannot afford to lose that customer, you want to make sure you factor those additional costs or boost your margin accordingly! It is not uncommon to see a 25-50% increase in personnel cost when your people have to work longer hours or you need an extra resource to replace someone who went on vacation!

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