Contractor Business
How Much Should a Contractor Charge Per Hour?
Calculate a profitable contractor hourly rate using labor burden, overhead, billable hours, and target margin—not guesswork.
A profitable hourly rate is not the wage you want to earn with a little extra added on top. It must cover payroll burden, nonbillable time, business overhead, risk, and profit. The right number is specific to your costs and capacity, so use the process below instead of copying a competitor’s rate.
WORKED PRICING EXAMPLE
Build the price in seven steps
Burdened labor = Wage × (1 + Labor burden rate)Overhead per hour = Annual overhead ÷ Annual billable hoursHourly cost = Burdened labor + Overhead per billable hourBilling rate = Hourly cost ÷ (1 − Target margin)Example: ($30 × 1.30) + ($62,400 ÷ 1,200) = $91 cost per hour$91 ÷ 0.75 = $121.33 billing rate at a 25% marginExample only. Replace every figure with your business’s actual costs and target.Start with the wage—not the billing rate
Choose the hourly wage the person performing the work should earn. For an owner-operator, use a realistic field wage separate from profit and owner distributions. Treating every dollar left over as personal pay hides whether the business itself is profitable.
Calculate the fully burdened labor cost
Add employer payroll taxes, workers’ compensation, unemployment insurance, benefits, paid leave, training, and other employee-related costs. If a technician earns $30 per hour and labor burden adds 30%, the burdened labor cost is $39 per paid hour—not $30.
Divide annual overhead by realistic billable hours
List annual overhead such as vehicles, fuel not charged directly to jobs, insurance, software, phones, office time, licenses, accounting, marketing, tools, and shop costs. Divide that total by realistic billable hours. Do not use 2,080 hours per worker: estimates, travel, callbacks, meetings, weather, and administration reduce what can actually be billed.
Add labor cost and overhead per billable hour
Suppose burdened labor is $39 per paid hour, annual overhead is $62,400, and the business expects 1,200 billable hours. Overhead is $52 per billable hour. Before profit, the required rate is already $91 per billable hour. This is why a rate based only on wages often loses money.
Price for the target margin
After calculating cost per billable hour, divide it by one minus the target gross margin. If hourly cost is $91 and the target margin is 25%, the billing rate is $91 ÷ 0.75 = $121.33. Round deliberately based on your quoting method; do not confuse a 25% margin with a 25% markup.
Decide when hourly pricing fits
Hourly pricing works well when scope is uncertain, diagnostic work is involved, or the customer controls how long the work continues. Fixed-price quoting may be better when the scope is predictable and efficiency should benefit the contractor. Even with fixed pricing, an accurate internal hourly cost is essential.
Set a minimum service charge
Short jobs still require scheduling, travel, setup, administration, and payment processing. A one- or two-hour minimum, diagnostic fee, or service-call charge prevents a thirty-minute task from consuming half a day without recovering its real cost. State the minimum clearly before dispatch.
Review the rate with actual job data
Compare estimated and actual labor hours, revenue, callbacks, and overhead at least quarterly. If utilization falls or expenses rise, the required rate changes. Track whether completed work achieved the intended margin, then adjust the rate or estimating assumptions.
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