Guide
4 min read
By MSP Margin Editorial
A flat-fee managed services agreement hides the relationship between what a client pays and how much work they take. The invoice is the same every month. The ticket volume is not.
Effective hourly rate brings that relationship back into view. It is one of the simplest numbers an MSP can calculate, and it is one of the most useful for pricing renewals.
The formula and the hours that count
The calculation is:
Effective hourly rate = agreement revenue ÷ hours delivered under the agreement
Use the same period for both numbers. A single month is noisy because one bad week or one onboarding can swing the result. A trailing three months is a reasonable minimum, and twelve months is better for renewal decisions.
Revenue should be the recurring agreement fee only. Leave out resold licenses, hardware and separately billed projects. Licensing especially will inflate the result if it stays in.
Hours take more thought. Include all time logged against the agreement: reactive tickets, scheduled maintenance, patching follow-up, alert triage, user adds and removes, and after-hours calls. Include time spent on the client by your NOC or security staff if it is logged. Leave out project work billed on its own, and leave out time on work the client is paying for separately.
Account management time, such as business reviews and vCIO meetings, is a judgment call. Some MSPs include it because the agreement covers it, others track it apart. Either is fine if you are consistent across clients.
The number is only as good as your time entry. If technicians skip logging quick fixes, every agreement looks better than it is, and the clients who generate many small requests look best of all.
An example across four agreements
Here is an illustrative example using one quarter of data, with monthly averages.
| Client | Monthly fee | Monthly hours | Effective rate |
|---|---|---|---|
| A | $6,000 | 40 | $150.00 |
| B | $4,500 | 30 | $150.00 |
| C | $3,000 | 45 | $66.67 |
| D | $2,400 | 12 | $200.00 |
| Total | $15,900 | 127 | $125.20 |
The blended rate of $125.20 looks acceptable on its own. The client-level view tells a different story. Client C pays the third-highest fee but uses the most hours, and its rate is less than half of A and B. Client D is the smallest agreement and the most profitable per hour.
Without this view, the instinct is often to focus on the largest invoices. Here the problem client is a mid-sized one.
Reading it against your project and T&M rate
The natural benchmark is your standard hourly rate for time-and-materials and project work. If that rate is $150, the example above says A and B are earning it, D is beating it, and C is well below.
A flat-fee agreement should generally land at or above your T&M rate. You are carrying the risk that the client needs more help than expected, and you are paying for the tools that make the agreement work. An agreement that consistently comes in below your T&M rate means the client would pay less buying your time by the hour than they pay under the agreement.
Keep in mind that effective rate is revenue per hour, not profit per hour. It does not account for the per-seat cost of RMM, security and backup tools. Two clients with the same rate can have different margins if one has far more endpoints. For a fuller view, some MSPs also calculate a version that subtracts direct tool costs from revenue before dividing by hours.
What to do with agreements that come out low
A low rate is a starting point for diagnosis, not a reason to drop the client. Common causes include:
- The client added users or devices and the agreement was never updated.
- Project-sized work is being logged as support tickets instead of quoted separately.
- An unstable environment, such as aging hardware or a problem application, is generating repeat tickets.
- Scope was never clearly written, so the client treats the agreement as unlimited.
- The agreement was priced low to win the business and never revisited.
The fix follows the cause. True up seat counts first, since that is often a contract term you can enforce now. Propose a remediation project for unstable environments, so the root problem gets fixed once instead of being supported forever. Clarify scope in writing. At renewal, reprice using the actual hours and your target rate as the basis.
If a client will not accept any of those changes, then it is a decision about whether to keep the agreement. That should be the last step, not the first.
Run the report quarterly, sort by effective rate, and review the bottom few agreements with your service manager. The pattern usually becomes obvious within a couple of quarters.
This article is general information about management reporting. How you record agreement revenue and costs in your books may depend on your contracts and accounting policies, so confirm treatment with your CPA.