The Economics of Transaction Costs: Adding It Up — A Cost Structure Analysis for Every Engagement

The problem with transaction costs is that each one feels trivial. Added up in a proper cost structure analysis, they're anything but.

Start with what your time actually costs

You can't cost a transaction until you know what an hour of your time is worth. Not your billing rate - your cost rate:

Cost per hour = Annual cost (salary + overheads) ÷ Realistically billable hours per year

Note "realistically billable." If you bill 1,000 hours a year, not 2,000, every non-billable hour costs twice what a naïve calculation suggests - because it displaces an hour you could have sold. This is where the difference between fixed cost and variable cost starts to matter: your overheads run whether or not you're busy, so idle capacity is pure loss.

Separate direct cost and indirect cost

A clean cost structure analysis splits every engagement into two buckets:

• Direct cost - the time and inputs that go into doing the work the client is paying for.
• Indirect cost - everything around it: winning, onboarding, coordinating, billing, collecting. These are your transaction costs, and they're almost always underestimated.

Understanding the difference between direct cost and indirect cost is what turns a vague "that felt like a lot of admin" into a number you can manage.

Map the transaction, step by step

Take one representative engagement and walk it end to end, logging the real time each step takes:

• Winning it: the enquiry, the call, the proposal, the back-and-forth — plus a share of the proposals that never converted.
• Setting it up: onboarding, checks, the engagement letter, gathering information.
• Running it: coordination, updates, chasing the client for what you need.
• Closing it: raising the invoice, following up, collecting — and any dispute time.

Do the math - a worked example

Say your cost of time is Rp 300,000/hour, and a small engagement looks like this:

Step	Type	Time
Enquiry, call, scoping	Indirect	1.5 hrs
Proposal + revisions	Indirect	1.0 hr
Share of unconverted proposals	Indirect	0.5 hr
Onboarding + engagement letter	Indirect	1.0 hr
Coordination during the job	Indirect	1.0 hr
Billing + two follow-ups	Indirect	1.0 hr
Total transaction (indirect) time		6.0 hrs

That's Rp 1.8 million of indirect cost — before a minute of the actual (direct-cost) work. On a Rp 15 million job, manageable. On a Rp 4 million job, it's most of your margin gone.

The uncomfortable question

Now ask: do my small jobs actually make money? Once you've run the cost structure analysis, many Professionals discover their smallest engagements run at or below break-even - subsidised by the big ones. That's not a reason to drop small work. It's a reason to make small work cheaper to transact.

The takeaway

You don't need a fancy system - one honest walk-through of a typical engagement tells you more than a year of gut feel. Once you can see the number, you can shrink it. Which is exactly where the next post goes.

Check out our guide to Profitability in Professional Services here.