Effective Rate
What is an effective rate?
An effective rate is what a firm actually earns per hour of work after discounts, write-offs, unbilled time, and slow collections. It is usually lower than the listed billing rate.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that tracks billed and collected revenue against hours worked, so effective rates reflect what the firm actually earns.
How to calculate it
- Divide revenue collected for a client or project by the total hours worked
- Compare the result with the listed billing rate
- Review by client and service to find where the gap is largest
The figures below are illustrative. A project takes 100 hours and the firm collects $12,000, so its effective rate is $120 per hour, even if the listed rate was $150.
Why it matters for service firms
Effective rate shows the real return on staff time. It exposes underpriced engagements, scope creep, and billing leaks that the rate card alone does not reveal.
Frequently asked questions
How is effective rate different from realization rate?
Effective rate is a dollar amount per hour. Realization rate expresses collected revenue as a share of the value of the time at standard rates. Both describe the same leakage in different ways.
How can a firm raise its effective rate?
Reduce discounting, bill promptly, control scope with change orders, and collect on time. Raising list prices helps only if the extra amount is actually collected.
Related terms and guides: billing rate, effective hourly rate, realization rate, and revenue leakage.