Glossary
Effective hourly rate
Effective hourly rate is the total revenue earned on a piece of work divided by the total hours actually spent delivering it. It works regardless of how the work was billed, fixed fee, hourly, or retainer, so it measures what an agency actually earns per hour once delivery is done, not what the quote implied.
How to calculate effective hourly rate
Divide the total revenue collected on a project or engagement by the total hours actually worked on it, including any hours that ran over the original estimate.
The quoted or headline rate is only the plan. Effective hourly rate is what actually happened, so it needs accurate time logs covering every hour worked, not just the hours that were billed.
Effective Hourly Rate = Total Revenue / Total Hours Worked
Example: a $24,000 fixed-fee project quoted at an implied $200/hour (120 estimated hours) that actually takes 160 hours has an effective hourly rate of $150/hour.
Effective rate vs quoted rate
The quoted rate is what a proposal or rate card promises. The effective rate is what the work actually returned per hour once it was delivered. The two only match when a project runs exactly to estimate, which is rare.
Tracking the gap between them, project by project, shows which types of work are quietly eating margin even when they look fine on the invoice.
What drags effective rate below the quoted rate
Three things usually explain the gap: hours worked but never logged, unbilled scope creep added after the quote, and revision or rework cycles that were not part of the original estimate. All three add hours to the denominator without adding revenue to the numerator.
Example
A consultancy quotes a project at an implied $180/hour based on an estimated 130 hours, for a fixed fee of $23,400. The work ends up taking 175 hours because of two rounds of unscoped revisions. The effective hourly rate is $23,400 / 175 = $133.71/hour, a 26% drop from the quoted rate. The project still shows a $23,400 invoice, so the erosion is invisible unless hours are tracked against revenue.
