What your hour actually costs

Most people in the trades set their rate the same way: they find out what the guy down the road charges, take a little off, and hope the work comes. It usually does. That is the problem. Work coming in feels like proof the number is right, and it is not proof of anything except that you are cheaper.

Your rate is not a market opinion. It is arithmetic. And until you have done the arithmetic once, you are guessing with your own money.

Here is how to stop guessing.

The number most people use

Ask a working contractor what their hourly rate is and you will usually hear a round number. Sixty-five. Eighty-five. A hundred and twenty-five. Round numbers are a tell. Nothing in a business lands on a round number by itself — it lands there because somebody picked it.

The follow-up question is the one that matters: what does an hour cost you before you make a cent? Most people have never worked it out. They know what they charge. They do not know what they need.

Those are different numbers, and the gap between them is your business.

The build-up

There are three pieces. Do them in order.

One: what you need to pay yourself. Not what is left over. What you need. Take your household number — the mortgage or rent, the truck payment, groceries, insurance, the kids, something for a bad month — and write it down as a year. Say that is $72,000. That is not a target. That is the floor, and it goes in the price the same way copper does.

Two: what it costs to be open. This is overhead, and it is the piece everyone skips because none of it shows up on a job. Truck payment and fuel. Insurance — general liability, and workers' comp if you have anyone. Phone. Software. The accountant. Licenses and renewals. Tools that wear out. The storage unit or the shop. Advertising, if you do any. Add it up for a year. For a solo operator running one truck, $18,000 to $30,000 is a normal range. Say yours comes to $24,000.

Three: how many hours you can actually bill. This is where the arithmetic usually breaks, so go slowly.

There are 2,080 working hours in a year at forty a week. You will not bill 2,080. You will not bill close to it.

Take out two weeks of vacation and a week of holidays — that is 120 hours gone, and you should take them. Take out sick days and the days weather kills the schedule. Then take out the part nobody counts: quoting, driving, picking up material, chasing invoices, answering the phone, fixing the callback you did not charge for. For most one-truck operators that is somewhere between a quarter and a third of the week.

A solo contractor who works hard and stays busy bills somewhere around 1,200 to 1,400 hours a year. Not 2,080. If your number is higher than 1,500, you are either working far more than forty hours or you have not counted the driving.

Use 1,300 and be honest with yourself.

A worked example

Put the three pieces together.

• Your pay: $72,000
• Overhead: $24,000
• Billable hours: 1,300

$72,000 plus $24,000 is $96,000. Divide by 1,300 hours and you get $73.85 an hour.

What the year has to cover, before you bill a single hour

One person, one truck, 1,300 billable hours.

What you need to pay yourself

$72,000

What it costs to be open

$24,000

What the business has to earn

$96,000

That is not your rate. That is your break-even — the number where you have paid yourself and kept the lights on and made exactly nothing. Charge $73.85 and you have a job with extra paperwork.

Profit is a separate line and it goes on top. Profit is what pays for the truck you have not bought yet, the slow February, the customer who does not pay, and the day you want to hire someone. Ten percent is thin. Twenty is healthy for a small shop.

At 20%: $73.85 divided by 0.8 is $92.31 an hour. Call it $92.

Now look at that number next to whatever you are charging today. For a lot of people that comparison is the whole article.

What it does not include

Two things, and both catch people out.

Materials are not in this number. This is the cost of your time. Materials get marked up separately, and the right number varies by trade and by item far more than most owners expect. Standard stock commonly runs 15% to 30%, fixtures nearer 35%, and special-order or custom items up to 50%. Small parts off the truck in electrical and service work are often marked up 100% or more, because that markup is paying for carrying the part rather than for the part itself. Commercial subcontract work sits lower and tighter, around 20% to 35% on direct cost.

Use your own trade's number rather than borrowing another trade's, and be certain which one you are quoting: a 25% markup is a 20% margin, and those are not the same thing. If you have been quoting a rate that you believed had "a bit extra for material in there," you have been quoting two numbers as one and you cannot tell which is wrong.

Subs are not in this number either. If you carry a sub on a job, their cost is a job cost like copper is, and it takes its own margin for the risk you are carrying by standing behind their work.

The part that stings

When people first run this, the number that comes out is higher than what they have been charging. How much higher depends entirely on how wrong the old rate was, so there is no honest average to hand you. What can be measured is where trades end up: the typical specialty contractor nets 5% to 10%, and the ones who price off their own numbers reach 12% and better. Electrical sits near the top of that spread and roofing near the bottom, for the same reason in both cases — how much of the job is material you are only passing through. The reaction is almost always the same: nobody around here will pay that.

Two things are true at once.

The first is that some of them will not, and that is information. If your honest break-even is above what your market pays, the problem isn't your price. You're either chasing the wrong customers or your costs are too high. Charging less than the job costs you doesn't fix either one.. It just moves the loss onto you.

The second is that the number is usually less scary than it looks, because it is an hourly figure and customers do not buy hours. They buy the job. A $92 rate on a four-hour job is $368 of labor. Most people do not flinch at $368. They flinch at "$92 an hour" because it sounds like a lot compared to a wage — and it is not a wage, it is a business carrying a truck, insurance and a slow season.

What to do Monday

Sit down for forty-five minutes with a pen and do this once.

1. Write your household number as a year. The real one. Not the one you would say out loud to a stranger.
2. List every bill that exists whether or not you work this week. Truck, insurance, phone, software, accountant, licenses, tools, shop. Total it for a year.
3. Count your billable hours honestly. Start at 2,080, take out time off, take out the driving and quoting and chasing. If you land above 1,500, count again.
4. Add pay and overhead, divide by hours. That is your break-even.
5. Divide by 0.8. That is a rate with 20% profit in it.
6. Write both numbers on one card and keep it in the truck. The break-even is the line you never go under, whatever the job. The other one is what you quote.

You do not have to change your price this week. You do have to know the number. Almost nobody does, and the ones who do quote differently — not louder, just steadier, because they know exactly where the floor is and they stop negotiating when they reach it.

Run it again every January, and any time the truck, the insurance or your household number changes.