Why wage times two does not work
A lot of shops set their rate by taking the tech's wage and doubling or tripling it. That rule ignores the two numbers that move the answer most: how much overhead the shop carries, and how many hours a tech actually bills. Two shops paying the same wage can need very different rates.
The method below takes four inputs. Get each one from your own books, not from what a neighbor charges.
Step 1: Burdened labor cost
The burdened labor cost is everything a tech costs you, not just the wage: payroll taxes, workers' comp, health insurance, retirement match, paid time off, holiday pay, uniforms, phone and training. Add it up for a year.
Example only: a tech earns $35 an hour for 2,080 paid hours, which is $72,800. The shop's extra costs on top of wage come to 30 percent, or $21,840. Burdened cost: $94,640 a year.
Step 2: Billable hours and utilization
Paid hours are not billable hours. Take out vacation and holidays, then take out the time on the clock that no customer pays for: drive time you do not charge, supply house runs, meetings, callbacks, waiting on a customer. What is left, as a share of the hours available, is technician utilization.
Example: 2,080 paid hours minus 120 hours of vacation and holidays leaves 1,960 available. If 60 percent of those are billed, the tech bills 1,176 hours a year. Burdened cost per billable hour: $94,640 / 1,176 = $80.48.
Measure utilization from timesheets and invoices for a few months rather than guessing. The tech capacity calculator helps you see how many billable hours your crew really has.
Step 3: Overhead per billable hour
Overhead is every cost that is not a specific job: office staff, rent, trucks and fuel, insurance, software, marketing, phones, the owner's salary if the owner is not billing. Divide the yearly total by all the billable hours of all your techs.
Example: $420,000 of overhead across 5 techs at 1,176 billable hours each (5,880 hours) is $71.43 per billable hour.
Step 4: Add your target margin
Cost per billable hour is $80.48 + $71.43 = $151.91. That is your break-even. To earn a profit, divide by one minus your target net profit margin. For 20 percent: $151.91 / 0.80 = $189.89, call it $190 an hour.
Do not multiply by 1.20 instead. That is a 20 percent markup, which gives only about a 17 percent margin. The difference is covered in markup vs margin.
The full worked example, and what utilization does to it
Same shop, same wage, same overhead, three utilization levels. Example numbers only.
| 50% utilized | 60% utilized | 70% utilized | |
|---|---|---|---|
| Billable hours per tech | 980 | 1,176 | 1,372 |
| Burdened labor per billable hour | $96.57 | $80.48 | $68.98 |
| Overhead per billable hour | $85.71 | $71.43 | $61.22 |
| Cost per billable hour | $182.29 | $151.91 | $130.20 |
| Rate for a 20% margin | $227.86 | $189.89 | $162.75 |
Turning the rate into prices
Most residential shops do not show an hourly rate to the customer. They use it to build flat prices: hours for the task times the rate, plus materials at your material markup, rounded. The job pricing and markup calculator does that math per job. See how to build a flat-rate price book for the rest.
A few rules that keep the rate honest:
- Set a separate rate for helpers and apprentices. Their burden is lower, but they carry the same overhead per hour.
- Recalculate once a year and any time wages, insurance or rent jump.
- Price drive time either into the rate or as a trip charge, never both and never neither.
- Use an after-hours rate for nights and weekends rather than eating overtime at the day rate.
- Check the rate against finished jobs. If job costing shows jobs landing below target, the hours or the utilization in your math are off.
How SWITCHBOARD handles this
SWITCHBOARD records hours from the job, so utilization comes from real timesheets, and your estimates show live margin against your target as you build them, with missing costs flagged rather than guessed.
Questions people ask
What is a good labor rate for a contractor?
There is no single number. Your rate depends on your wages, overhead and how many hours your techs bill. Work it out from your own books with the four steps here rather than copying a competitor.
What is technician utilization?
The share of a tech's available hours that a customer actually pays for. Drive time you do not bill, supply runs and callbacks all lower it.
Should overhead go into the labor rate or the material markup?
Most shops recover overhead through labor hours, because labor is the steady part of every job. Material markup then covers handling, waste and the risk on parts.
How often should I recalculate my labor rate?
At least once a year, and whenever a big cost changes, such as a raise, a new truck, a rent increase or a new office hire.
Should I charge separately for drive time?
Either build drive time into the rate, which lowers utilization in the math, or charge it as a trip charge and leave it out of utilization. Pick one method so drive time is paid for exactly once.