How Much Should a Contractor Charge Per Hour to Make a Profit?

The formula in plain words

Your hourly rate is your yearly business costs divided by the hours you can bill, with profit added on top. Costs include your own paycheck, not just the bills. Billable hours are the hours a customer pays for, and they are always fewer than the hours you work.

Rates differ by trade, by town, and by how much overhead you carry. That is why a number from a forum or a friend can be wrong for you. Work out your own floor first. Then compare it to what your market will pay.

Step 1: Add up a full year of costs

Write down everything it costs to run the business for twelve months. Start with your own wage and any helper or crew wages. Then add payroll taxes, workers comp, and liability insurance. Add license and permit fees, truck payments, fuel, repairs, tools, and the cost of replacing tools that wear out. Add your phone, software, advertising, accounting, office or shop rent, card processing fees, and the cost of callbacks you fix for free.

Use bank and card statements, not memory. The costs people forget are the ones that hit once a year, like insurance renewals, license renewals, truck repairs, and tool replacement. Add them in, then divide by twelve to see what the business needs each month.

Pay yourself a real wage in this total. If you leave it out, your profit is just unpaid labor. How you pay yourself and what you set aside for taxes depends on your business structure and your state, so ask an accountant.

Step 2: Count the hours you can really bill

Forty hours a week does not mean forty billable hours. Time goes to writing estimates, driving, supply house runs, phone calls, paperwork, callbacks, bad weather, and cancellations. None of that time shows up on a customer invoice, but all of it is paid for out of your rate.

Here is an example. Say you work 48 weeks a year after holidays and time off. Say 25 hours of each week are billable. That is 1,200 billable hours. Your numbers will differ, so track a few normal weeks and use what you find. A shared calendar helps you see how full your days really are, and vehicle tracking can show how much time goes to driving.

Step 3: Add profit and get your rate

Here is a worked example. The numbers are made up to show the steps, so use your own. Say you want to pay yourself 60,000 dollars a year, and your overhead is 30,000 dollars. Your yearly cost is 90,000 dollars. Divide by 1,200 billable hours and you get 75 dollars an hour. That is your break-even rate. At 75 dollars you pay every bill and pay yourself, but the business earns nothing extra.

Now add profit. Profit pays for slow months, a new truck, a mistake on a bid, or growth. Say you want profit to be 15 percent of the price. Divide your cost by 0.85, which gives about 88 dollars an hour. Notice this is margin, which is a share of the selling price. A 15 percent markup on cost would give about 86 dollars, which leaves you a smaller share of the price as profit. Pick margin or markup and use the same one every time.

Charge materials separately. Add a markup on parts and supplies that covers the time you spend ordering, picking up, hauling, and returning them, plus the risk of warranty problems. Do not bury materials in your labor rate unless your quotes are built that way on purpose.

Rates for helpers and crews, and hourly versus flat price

A helper costs more than the wage on their paycheck. Say a helper earns 30 dollars an hour and payroll taxes, insurance, and paid time add 8 dollars. Their cost is 38 dollars an hour. Add your overhead share per billable hour, which was 25 dollars in the example above (30,000 divided by 1,200). That makes 63 dollars. Divide by 0.85 for a 15 percent profit margin and you get about 74 dollars an hour for that helper. This is a simple version. Your own overhead split may be different.

Many contractors use their hourly rate behind the scenes and quote a flat price. Estimate the hours, multiply by the rate, add materials, and give the customer one number. Customers like knowing the total. Keep the hours estimate written down so you can compare it to the real hours after the job. If the scope grows, write a change order instead of eating the extra time.

Check your rate against the market, then review it

Once you know your floor, look at what other local contractors charge for the same work. Do not copy them blindly. Their costs, insurance, and crew may be nothing like yours. If the market pays less than your floor, you have choices. You can cut costs, raise your billable hours, move toward work that pays better, or turn down jobs that lose money. Cutting your rate to win a bid is the choice that hurts most over time.

Review your rate once a year, and any time fuel, insurance, or labor costs jump. After each finished job, compare estimated hours to actual hours. If you keep running over on one kind of job, your rate or your hour estimates for that job are too low. Keep your rate, hours, and materials markup in one estimate template so every bid starts from the same math.

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