How to calculate your billable hourly rate

If you charge by the hour, or build flat-rate prices from estimated hours, your billable hourly rate is the number everything else rests on. Many owners set it by checking what other companies charge. That tells you what customers are used to paying, but nothing about whether the rate covers your costs. This guide shows how to calculate a rate from your own numbers in five steps. The worked example uses made-up figures so the math is easy to follow, and your real numbers will be different.

The idea in one line

Billable hourly rate = (labor cost + overhead) ÷ billable hours, then priced up for profit

The division is the easy part. The hard part is getting honest numbers for each piece, especially billable hours, which is where most rates go wrong.

Step 1: Work out your real billable hours

A tech you pay for 40 hours a week doesn't bill 40 hours a week. Time goes to driving between jobs, loading the truck, picking up parts, writing estimates, callbacks you don't charge for, training, meetings and rain days. Then there are holidays, vacation and sick days.

Start with paid hours and work down:

1. Paid hours per year = hours per week × 52
2. Available hours = paid hours − holidays − vacation − sick and training days
3. Billable hours = available hours × billable share

Your billable share is the portion of on-the-clock time spent on work you actually charge for. Don't guess it. Pull two to four weeks of timesheets and job records, add up the hours that ended up on an invoice, and divide by the hours you paid for. If you work in the field yourself, track your own time too.

Example (made-up numbers): A tech is paid for 40 hours a week, so 2,080 hours a year. Take away 10 holidays (80 hours), two weeks of vacation (80 hours) and five sick or training days (40 hours), and you get 1,880 available hours. If timesheets show 65% of that time is billable, the tech bills about 1,222 hours a year.

That's a big drop from 2,080, and it's exactly why rates set by gut feel tend to come out too low.

Step 2: Add up your true labor cost

A wage is only part of what an employee costs. Your loaded labor cost includes:

• Wages, including paid time off and any overtime you expect
• Employer payroll taxes
• Workers' compensation insurance
• Health insurance and other benefits
• Retirement contributions
• Tool allowances, uniforms, licenses and training you pay for

Taxes and insurance vary by location and trade, so get the real figures from your payroll provider or accountant.

Labor cost per billable hour = annual loaded labor cost ÷ annual billable hours

Example (made-up numbers): The tech earns $30 an hour, or $62,400 a year. Say payroll taxes and workers' comp add $9,000 and benefits add $6,000, for a loaded cost of $77,400. Divide by 1,222 billable hours and labor alone costs about $63.34 per billable hour.

Read that again. In this example, a $30-an-hour tech costs the business more than $63 for every hour you can bill, before a single dollar of overhead.

Step 3: Add your overhead

Overhead is everything the business spends that isn't tied to a specific job:

• Vehicles: payments, fuel, insurance and maintenance
• Shop or office rent and utilities
• Office staff and dispatchers
• Software, phones and internet
• Marketing and advertising
• Business insurance, licenses and bonds
• Accounting and legal fees
• Tools and equipment you don't bill to jobs
• Small consumables you don't itemize, like tape, rags and fittings
• Your own salary, if you mostly run the business rather than work in the field

Overhead per billable hour = annual overhead ÷ total billable hours for the whole team

Example (made-up numbers): The company has three techs, each billing about 1,222 hours, for 3,666 billable hours in total. Annual overhead is $180,000. That works out to about $49.10 per billable hour. To keep it simple, the example assumes all three techs cost the same. With a mixed team, add up everyone's loaded labor cost and divide by everyone's billable hours.

Last year's profit and loss statement is the best starting point for overhead. Then add anything you know is changing this year, such as a new truck payment or a bigger insurance renewal.

Step 4: Add profit the right way

Add labor and overhead together and you get your break-even cost per billable hour. In the example, $63.34 + $49.10 = $112.44. Charge that and you cover every cost but make nothing.

Now add profit. This is where many owners trip up, because markup and margin are not the same thing.

• If you add 20% to $112.44, you charge $134.93. Your profit is $22.49 an hour, which is only about 16.7% of the price.
• To keep a set percentage of the price as profit, divide instead of multiplying.

Billable hourly rate = break-even cost ÷ (1 − target profit margin)

Example (made-up numbers): For a 20% net profit margin, $112.44 ÷ 0.80 = $140.55. Round up to a clean number such as $145.

What margin should you aim for? That depends on your goals, your debt, how much you want to reinvest and how much risk you carry. Set a target with your accountant rather than borrowing a number from someone else.

Step 5: Sanity-check the number

A calculated rate is a starting point. Before you use it, check it three ways.

Against last year. Divide last year's labor revenue by last year's billable hours. That's your effective rate: what you really earned per billable hour after discounts, unbilled time and write-offs. If it's well below your calculated rate, you have leaks to fix as well as prices to raise.

Against the market. Look at what customers in your area are used to paying, but only as a check. If your rate is far higher, look hard at your billable share and overhead. Could tighter routing cut drive time? Are you giving away time you could bill? If your rate is well below the market, you may be leaving money on the table.

Against small jobs. Short calls rarely cover the drive, setup and paperwork. A minimum charge, a first-hour rate or a trip charge protects you on small jobs.

The whole example on one page

Every input here is invented. The method is what matters.

How the inputs change by trade

The formula works for any trade, but the inputs that move the number differ.

• Plumbing and HVAC: Stocked trucks, drive time between calls and after-hours work raise overhead and lower the billable share.
• Electrical: Permit trips, inspections and waiting on utilities eat into billable time. Track them so they're priced into jobs rather than absorbed.
• Cleaning: Teams do the work, so calculate a rate per labor hour, then multiply by the number of cleaners and the hours a visit takes. Supplies can sit in overhead or be priced per visit.
• Landscaping and snow removal: Seasons cut the number of billable weeks, and mowers, trailers and plows are big costs. Some companies add an equipment charge per hour on top of labor.
• Roofing and painting: Weather days reduce billable hours. Crews work as a unit, so a crew-hour rate often makes more sense than a single-person rate.
• Handyman: Lots of small jobs means lots of drive time and setup for little billed work. Minimum charges matter more here than almost anywhere.

After-hours and emergency rates

Work outside normal hours costs more to deliver. You may pay overtime or on-call pay, and a midnight burst pipe disrupts the next day's schedule. To price it:

1. Redo Step 2 with the wage you actually pay for after-hours work.
2. Adjust the billable share if after-hours calls involve more driving and waiting.
3. Add a premium that reflects the disruption and the value to the customer.

Tell customers the after-hours rate before you head out, so nobody is surprised at the door.

Materials are priced separately

Your hourly rate covers labor and overhead. Parts and materials should carry their own markup, not hide inside the hourly number. Keeping them separate shows you whether each job made money on labor, on materials or on both. Our guide to job costing shows how to track both on every job.

If you use flat-rate pricing, your hourly rate still does the work behind the scenes:

Flat price = (estimated hours × billable hourly rate) + marked-up materials

For example, with made-up numbers again, a faucet replacement estimated at 1.5 hours at $145 is $217.50 in labor, plus the faucet and supplies at your materials markup. Put prices like this into a price book so every tech quotes the same way.

Mistakes that keep rates too low

• Assuming every paid hour is billable. This one mistake can throw off the whole rate.
• Using a rule of thumb such as "charge double the wage." It's a guess that ignores your real overhead.
• Forgetting your own pay.
• Treating markup as margin.
• Never updating. Recalculate at least once a year, and whenever a big cost changes: a new truck, a new hire, an insurance renewal or a rent increase.

Numbers to gather before you start

• Last year's profit and loss statement
• Payroll reports showing wages, payroll taxes and benefits
• Workers' comp and business insurance premiums
• Two to four weeks of timesheets and invoiced hours
• Vehicle costs: payments, fuel, insurance and maintenance
• Rent, utilities, software, phones and marketing spend
• Your own pay, and whether you work in the field or the office
• A target profit margin agreed with your accountant

Once your rate is set, our job costing calculator helps you check individual jobs. And when you can price your common jobs with confidence, you can show starting prices on your website so customers know what to expect before they call. Zome's instant quotes are one way to do that.