This article is one in a series of articles on Agency Accounting that can be found in the Accounting Section of the Library on this site.

Agency compensation is based on a formula that in general tries to cover the amount of time the agency is going to spend on the client’s business. Although the agency may get commission on media or production purchasing, or even additional income from the creative services area, the fee is the main form of agency compensation.

In earlier articles I mentioned how the agency might figure out it’s hourly rate and the amount of chargeable hours an employee is billable. This rate multiplied by the hours is equivalent to one agency FTE billable cost. (Keep in mind that the FTE doesn’t mean you are locked into a dedicated staff member, the FTE is used as a time equivalent.)

Here are some examples of fee arrangements that vary hourly rates and overall billable hours per FTE. In some cases, it may be better to lower or raise your rate depending on the amount of hours you think will be billable to the client.

For example, if the agency thinks that they will need 5 people on the account (5 FTE’s) for one year, then the cost would be figured out by the following:
Fee Formula:
Agency blended rate = $175 an hr.
Agency billable hours = 1400 hrs.
1 FTE = $245,000.
5 FTE’s = $1,225,000 yearly fee.
or about $102,000 a month,
or 7,000 billable hours a year.

A second example, if the agency thinks that they will need 5 people on the account (5 FTE’s) for one year, then the cost would be figured out by the following:
Fee Formula:
Agency blended rate = $200 an hr.
Agency billable hours = 1600 hrs.
1 FTE = $320,000.
5 FTE’s = $1,600,000 yearly fee.
or about $133,333 a month,
or 8,000 billable hours a year.

Third example, if the agency thinks that they will need 10 people on the account (10 FTE’s) for one year, then the cost would be figured out by the following:
Fee Formula:
Agency blended rate = $200 an hr.
Agency billable hours = 1600 hrs.
1 FTE = $320,000.
10 FTE’s = $3,200,000 yearly fee.
or about $266,666 a month,
or 16,000 billable hours a year.

or the reverse,
Client’s budget is $3,000,000 yr.
1 FTE is equivalent of 1600 hours
Agency blended rate = $200 an hr.
1 FTE = $320,000
which equals 9.375 FTE’s.
or 15,000 billable hours a year.

Please read my other articles on the site for more info.