How to calculate a burdened labour rate and a selling rate that actually pays

Step 1: Start with the wage and add the burden

The burden is every cost that comes with having a person on payroll, beyond the hourly wage. List each one for a typical field employee over a full year.

• Employer payroll contributions required by law
• Workers' compensation premiums for your trade classification
• Vacation pay and statutory holiday pay
• Health and dental benefits, and any pension or retirement matching
• Trade or union dues and training you pay for
• Tools, safety gear and clothing allowances
• Cell phone, tablet and software seats used in the field

Add those up and divide by base wages to get a burden percentage. For our example, a technician paid $40 an hour carries $12 of burden per paid hour: a 30% burden and a cost of $52 per paid hour. Your figure might be lower or quite a bit higher, depending on benefits, union agreements and your province's compensation premiums. Do not borrow a number from another shop.

Vehicles can go here too, if each technician has a dedicated truck. Many firms prefer to keep vehicles in overhead; either works if you are consistent.

Step 2: Find your billable efficiency

You pay for every hour on the timesheet, but you can only charge customers for some of them. The rest is travel between jobs, morning loading, shop time, training, warranty callbacks, waiting for parts and paperwork.

Billable efficiency is billable hours divided by paid hours. Measure it from last year's records: take field hours charged to customer jobs and divide by total paid field hours.

In our example the technician is paid for 2,080 hours a year and 1,500 of them are billable, an efficiency of about 72%. That changes the cost per billable hour a lot:

$52 × 2,080 ÷ 1,500 = $72.11 per billable hour

This is the single most overlooked step. An owner who prices off the $52 figure is undercharging by $20 an hour before overhead is even counted.

Raising efficiency is often worth more than raising prices. Tighter dispatch routes, parts on the truck and fewer callbacks lower your cost per billable hour directly. That is part of what capacity planning works on.

Step 3: Spread overhead across billable hours

Overhead is everything you spend to run the business that is not tied to a specific job: office and dispatch wages, the owner's salary if they are not on the tools, rent, insurance, bonding, vehicles (if not in burden), fuel, software, phones, marketing, accounting and legal fees, and interest.

Take the annual total and divide it by your total billable field hours for the year.

Our example shop has six technicians at 1,500 billable hours each, so 9,000 billable hours. Overhead is $600,000.

$600,000 ÷ 9,000 = $66.67 of overhead per billable hour

If you run both service and construction work, split overhead between them before you do this. Dispatch, call handling and marketing mostly belong to service; estimating, project management and bonding mostly belong to construction. Using one blended overhead figure usually means service is underpriced and construction is overpriced, or the other way round. The service mix page covers how to split it.

Step 4: Add cost and overhead, then build in profit

Fully loaded cost per billable hour is labour cost plus overhead:

$72.11 + $66.67 = $138.78

Now set a target net profit margin. The correct way to add it is to divide, not multiply:

Selling rate = fully loaded cost ÷ (1 − target net margin)

For a 10% net margin: $138.78 ÷ 0.90 = $154.20 per hour

If you multiply by 1.10 instead, you get $152.66 and a net margin of only about 9.1%. The difference looks small on one hour. Across 9,000 hours it is close to $14,000 a year.

Step 5: Treat materials separately, and state markup as margin

Material and equipment markups are a second source of gross profit, not a substitute for a correct labour rate. Firms that underprice labour and "make it up on parts" are exposed the moment a customer supplies their own equipment, or a big commercial job is bought with owner-supplied material.

State material pricing as a margin so nobody confuses it with markup:

An estimator told to "add 25%" thinks they are earning 25%. They are earning 20%.

Step 6: Sanity-check against completed jobs

A rate is only a theory until it meets real work. Take ten completed jobs from last year and re-price them with the new rate and your actual hours. Compare the new price with what you charged and with what the job really cost.

You will usually find three groups: jobs that were fine, jobs that were underpriced because hours ran over, and jobs that were underpriced because the rate was wrong. The second group is a job costing problem. The third is a rate problem, and it is the one this guide fixes.

Common mistakes

• Using paid hours. Always divide by billable hours.
• Copying a competitor's rate. Their burden, efficiency and overhead are not yours, and they may be losing money too.
• Forgetting the owner. If the owner works in the business but takes little salary, add a market wage for the role to overhead. Otherwise the rate is propped up by unpaid work, which a buyer will notice. See exit planning.
• One rate for everything. After-hours, emergency and commercial project work carry different costs and risks.
• Never updating it. Wages, insurance and fuel all move. Recalculate yearly.

What to do next

Work through the six steps with your own numbers. If the result is higher than what you charge today, you have found the reason your busy years feel thin. If you would like a second pair of eyes on the calculation, or help rolling a new rate out to estimators and customers, see our pricing and estimating service or browse the other guides.