How Much Should I Charge as a Contractor? 7 Pricing Mistakes and How to Fix Them

Ask ten contractors how they set their hourly rate and eight will say some version of "what everyone else charges". That is how a trade with plenty of work ends up with owners who are busy twelve months a year and have nothing in the bank in January. Pricing is not about the competition; it is about what your business costs to run and what you need it to pay you. Here are the seven mistakes we see most, and the fix for each.

Mistake 1: dividing by 2,000 hours

Fifty weeks of forty hours is 2,000 hours. Nobody bills 2,000 hours. Quotes, driving, buying materials, invoicing, call-backs and the phone eat 35 to 50 percent of the week. A solo contractor who works 48 hours a week bills 25 to 32 of them. Over 46 working weeks that is 1,150 to 1,470 billable hours, not 2,000.

Fix: track one normal week honestly, count the hours a customer actually paid for, and use that number.

Mistake 2: forgetting the costs an employer used to pay

When you were on a crew, someone else paid the insurance, the truck, the fuel, the tools, the phone, the licence renewals and the slow weeks. Now you do. Added up, a solo contractor's overhead is usually $15,000 to $35,000 a year before paying anyone a wage.

Fix: go through twelve months of bank statements once a year and total every business cost that is not a job's materials.

Mistake 3: treating your wage as the profit

If the business pays you $70,000 and has nothing left, it made no profit; it paid a wage. Profit is what remains after your wage and overhead, and it is what replaces the truck, carries you through February and funds the first employee. Small contractors should aim for 10 to 20 percent of revenue.

Fix: put your wage into the costs, then add a profit margin on top.

Mistake 4: confusing markup with margin

Adding 20 percent to costs (markup) gives a margin of only 16.7 percent of the price. After one surprise on the job, it is closer to 10. Contractors who think in markup consistently earn less than they believe.

Fix: to get a 20 percent margin, divide cost by 0.8, not multiply by 1.2.

Mistake 5: not marking up materials

Passing materials through at cost means you spent an hour at the supplier, carried the cost on your card for a month and took on the warranty for nothing. A 10 to 20 percent markup on materials is normal and expected.

Fix: mark up materials on every quote, and quote a total rather than itemising the markup.

Mistake 6: quoting the hourly rate

Customers compare an hourly rate to their own wage and to the lowest number they have ever heard. They compare a total to the value of a finished bathroom. Hourly rates also punish you for being fast.

Fix: use the hourly rate internally to build the price, then quote the job as a fixed total with a clear scope. Add 10 to 15 percent to your hour estimate for the things that always go wrong.

Mistake 7: never raising prices

Insurance, fuel and materials go up every year. A rate that was right three years ago is now a pay cut. The best time to raise prices is when you are booked out two weeks or more; that queue is the market telling you that you are cheap.

Fix: recalculate every January with the real figures from the year just finished. Apply the new rate to new quotes only. Expect to lose a few price-shoppers; losing the bottom 10 percent of customers while charging 20 percent more leaves you with more money and more evenings.

The method in one line

Example: ($75,000 + $24,000) / 1,288 hours = $76.86 break-even; divided by 0.85 for a 15 percent margin = $90.42. Charge $91 an hour, and price a 16 hour job with $850 of materials at 16 x $91 + $850 x 1.15 = $2,434.

Making the higher price easy to say yes to

Customers pay more for the contractor who looks organised: a written quote with a clear scope, photos of past work, reviews they can read, and a phone that gets answered. None of that costs much. A free ProBusiness101 listing gives you one page with your services, photos, Google review link and contact details to send with every quote, and our review link generator makes collecting the reviews a one-tap job for your customers.