Why most contractors charge too little
The common way to set a rate is to look at what the competition charges, or to take the wage you earned as an employee and add a bit. Both ignore the costs an employer used to carry for you: insurance, the truck, the tools, the slow weeks, the hours spent quoting jobs you did not win. The result is a business that is busy all year and has nothing left in December.
The right way is to work backwards from the life you want the business to pay for. The calculator does exactly that in four steps.
The four numbers that set your rate
1. The income you want
Your own wage, before personal tax, as if you were employed. Be honest and a little ambitious; this is the number the whole business exists to produce.
2. Overhead
Everything you pay whether or not you worked today. Go through a year of bank statements and add it up. Typical items for a solo contractor:
| Item | Typical yearly cost |
|---|---|
| General liability insurance | $800 to $3,000 |
| Vehicle payment, insurance, fuel, repairs | $8,000 to $15,000 |
| Tools, equipment replacement, consumables | $2,000 to $6,000 |
| Phone, software, website, email | $1,200 to $3,000 |
| Licences, permits, continuing education | $300 to $1,500 |
| Advertising and lead fees | $1,000 to $8,000 |
| Bookkeeping, accountant, bank fees | $800 to $2,500 |
| Health insurance (if the business pays it) | $6,000 to $18,000 |
Most solo operators land between $15,000 and $35,000. If you employ people, add their wages, payroll tax and workers' compensation to overhead too, or treat each employee's loaded cost as part of the labour you bill.
3. Billable hours
This is where the arithmetic surprises people. A 50 hour week does not mean 50 billable hours. Driving between jobs, picking up materials, writing quotes, chasing invoices and answering the phone are all unpaid. Most solo contractors bill 25 to 32 hours in a 45 to 50 hour week. Multiply by the weeks you actually work: 52 minus holidays, sick days and the slow weeks of winter is usually 44 to 48.
28 billable hours x 46 weeks = 1,288 billable hours. Dividing $100,000 of income and overhead by 2,000 hours gives $50 an hour; dividing by 1,288 gives $78. The second number is the true one.
4. Profit margin
Profit is not your wage; your wage is already in step one. Profit is what the business keeps to replace the truck, carry you through a quiet month, buy a bigger tool or hire a helper. Small contractors typically run 10 to 20 percent. The calculator applies it as a margin, meaning that share of the final price, which is what your accountant will measure.
The formula
Hourly rate = (income + overhead) / billable hours / (1 - profit margin)
Worked example: $75,000 income, $24,000 overhead, 1,288 billable hours, 15 percent margin. ($75,000 + $24,000) / 1,288 = $76.86 break-even. Divide by 0.85 and the rate is $90.42, so charge $91 an hour. Revenue for the year is about $117,000, of which $17,500 is profit.
Pricing a job from the rate
Once the hourly rate is set, a job price is labour plus materials:
- Labour = estimated hours x people x hourly rate. Estimate hours honestly and add 10 to 15 percent for the things that go wrong, because something always does.
- Materials = cost x (1 + markup). A 10 to 20 percent markup covers the time spent sourcing, collecting and guaranteeing them, and the fact that you pay for them before the customer pays you.
Quote the total, not the hourly rate. Customers compare hourly rates against the wrong things; they compare a total against the value of the finished work.
Markup and margin are not the same
| Markup on cost | Margin on price |
|---|---|
| 10% | 9.1% |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 33% | 25.0% |
| 50% | 33.3% |
A contractor who adds 20 percent to costs and thinks they make 20 percent profit is actually making 16.7 percent, and after a couple of surprises on the job, closer to 10.
Raising your prices without losing customers
- Apply the new rate to new quotes only. Finish existing jobs at the agreed price.
- Raise prices when you are busy, not when you are quiet. Being booked out two weeks is the signal that you are underpriced.
- 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 less work.
- Show the value: photos of finished work, reviews, a clear written quote. Customers pay more for the contractor who looks organised. A free ProBusiness101 listing gives you a page to send them with all of that on it.
Check the result against reality
If the rate the calculator gives is far above local norms, look at overhead and billable hours first; they are usually the figures people get wrong. If it is far below, you may have under-counted overhead or set an income that will not keep you in the trade. Run the calculator again every January with the real figures from the year just finished, and the rate will track your business rather than your guesses.