How to Set Your Labor Rate

The labor rate formula

Your labor rate has to pay for four things: the wage, the costs that ride on top of the wage, your overhead and your profit. It has to collect all four from billable hours, because those are the only hours a customer pays for.

Two lines do the whole job:

• Cost per billable hour = (yearly labor cost + yearly overhead) ÷ yearly billable hours
• Labor rate = cost per billable hour ÷ (1 minus your target profit margin)

Steps 1 to 4 below fill in each piece. Even if you never quote by the hour, this number sits under every flat-rate task, price per square, price per watt and detailing package you sell. If you'd rather not build the spreadsheet yourself, the free labor rate calculator runs the same steps.

Why the wage can't be your rate

The wage covers only part of what an hour of a worker costs you, and only some of the hours you pay for ever reach an invoice. Pricing off the wage, even at double, ignores both gaps.

Example: You pay a plumber $30 an hour and bill customers $60, so it looks like you're doubling your money. Say each paid hour really costs you $37.50 once payroll taxes, workers' comp and benefits are added, and the plumber bills 1,500 of the 2,080 hours you pay for in a year. Every billable hour then carries $52 of labor cost ($78,000 a year ÷ 1,500). At $60 an hour, $8 is left to pay for the truck, the rent, the phones and your own salary. The steps below build this plumber's real rate.

Step 1: Count the hours you can bill

Billable hours are the bottom of the fraction, so an optimistic guess here quietly lowers every price you set. Start with the hours you pay for and subtract everything a customer never sees on an invoice.

Measure, don't guess. Compare the hours you paid with the hours that reached an invoice over a recent stretch of timesheets. If you price by flat rate, count the book hours you sold, not clock time. No records yet? Have each tech note start and finish times on every job for two typical weeks and compare them with their timesheets.

Use a whole year where you can, because slow stretches count too: rained-out days on a roofing or pressure washing crew, quiet spring and fall weeks if your HVAC calls drop off between seasons, or a slow winter at a detail shop. Overhead doesn't shrink in those weeks, so the rate has to carry them.

Example: The plumber is paid for 2,080 hours a year (40 hours × 52 weeks). Ten paid days off take out 80 hours, leaving 2,000 hours at work over 250 workdays. About 2 hours of each day go to driving between calls, supply house runs, loading the truck and the odd callback: 500 hours a year. That leaves 1,500 billable hours, about 72% of the hours you pay for.

Step 2: Add up what each paid hour costs

Everything you pay because a person works for you belongs in their labor cost, often called the fully burdened cost. For each field worker, add up a year of:

• Wages for every paid hour, plus the overtime premiums, bonuses and commissions you expect. Covered nonexempt employees must be paid at least one and one-half times their regular rate for hours over 40 in a workweek ¹, so a busy season costs more per hour than a normal one. Paid time off is already inside this line, so don't count it again.
• Employer payroll taxes: your share of Social Security and Medicare, plus federal and state unemployment taxes. For 2026, the employer pays 6.2% Social Security tax on each employee's wages up to $184,500 and 1.45% Medicare tax on all wages ². Unemployment tax rates vary by state and often by employer, and the figures change yearly, so take your totals from your payroll provider or CPA, not a rule of thumb.
• Workers' compensation insurance: state law decides when you must carry it. Ask your agent for a quote based on your expected payroll and the kind of work your people do.
• Benefits you pay for, such as health insurance and retirement contributions.
• Per-person costs: uniforms and boots, a phone, tool allowances, training, and license or certification fees you cover.

Trucks, fuel and tools can go here or in overhead. Put each cost in one place only.

Example: The plumber earns $30 an hour for 2,080 paid hours: $62,400. Suppose your payroll provider shows $5,000 of employer payroll taxes for the year, the workers' comp premium on this payroll is $3,000, your share of health insurance is $6,000, and uniforms, phone, training and license fees add $1,600. (Your own figures depend on your state, trade and insurer.) The fully burdened labor cost is $78,000: $37.50 per paid hour, and $52 per billable hour ($78,000 ÷ 1,500) before a dollar of overhead.

Step 3: Spread overhead over billable hours

Overhead is everything the business spends that isn't tied to one job, and billable hours are how it gets paid. Start from the last 12 months of your profit and loss statement, then adjust for changes you already know about: a new truck payment, a rent increase, an insurance renewal, a planned hire.

Typical overhead lines:

• Office and admin pay, including your own pay for the hours you spend running the business instead of working jobs
• Vehicles: payments, fuel, insurance and maintenance (unless they're in labor cost)
• Rent, utilities and storage
• Business insurance and bonds
• Marketing and lead costs
• Software, phones and internet
• Accounting, legal and business license fees
• Tools and equipment not charged to a specific job
• Card processing and bank fees

Divide the year's overhead by the billable hours of everyone whose time you bill. Office hours don't count. If you split your own week between jobs and the office, put the field share of your pay in labor cost, the rest in overhead, and count your field hours as billable.

Example: The plumbing shop has two plumbers, each planned at 1,500 billable hours: 3,000 in all. Last year's P&L, adjusted for known changes, shows $150,000 of overhead, including the owner's pay for running the office and selling. Overhead is $150,000 ÷ 3,000 = $50 per billable hour. Add the $52 of labor cost and each billable hour costs the shop $102.

If your materials markup also covers overhead, don't recover the same overhead twice. Either put all of it in the labor rate (simplest for labor-heavy work like detailing and pressure washing) or subtract a conservative estimate of the gross profit you expect from materials before you divide.

Step 4: Add profit as a margin

Profit is what's left after every cost, including your own pay. It pays for the next truck, the slow months and the jobs that go wrong, so give it its own line instead of hoping something is left over.

Pick a target profit margin, then divide your cost per billable hour by one minus that margin. Don't add the same percentage as a markup: a markup on cost always leaves a smaller margin on the price. Markup vs margin shows the conversion.

Example: At $102 of cost per billable hour and a 15% target margin, the rate is $102 ÷ 0.85 = $120 an hour, which leaves $18 of profit on every billable hour. Adding a 15% markup instead gives $117.30, a margin of about 13%. Over 3,000 billable hours, planned profit at $120 is $54,000.

So the plumber paid $30 an hour bills at $120. That gap isn't padding: it's the wage, the burden, the overhead and the profit, collected only from the hours customers pay for. Copy this layout into a spreadsheet and put in your own numbers.

Example: The plumbing shop's calculation, per plumber:

Line	Amount
Wages (2,080 paid hours × $30)	$62,400
Payroll taxes, workers' comp, benefits, other	$15,600
Labor cost per year	$78,000
Billable hours	1,500
Labor cost per billable hour	$52
Overhead per billable hour ($150,000 ÷ 3,000)	$50
Cost per billable hour	$102
Labor rate at a 15% margin ($102 ÷ 0.85)	$120

If you work alone

The math doesn't change when you're the only one in the field, but you're also the office, the estimator and the bookkeeper.

• Your pay is labor cost, not profit. Use the salary you need or what you'd pay someone else to do your field work, whichever is higher. Profit is what's left after you're paid.
• Desk time is nonbillable. Quoting, invoicing, ordering, marketing and bookkeeping come out of your billable hours.
• Your own taxes and benefits are burden. As a sole proprietor you owe self-employment tax on your net earnings, which covers Social Security and Medicare at a combined rate of 15.3% ³. Count it, and any health insurance you buy for yourself, in your labor cost, and ask your CPA what to set aside.
• Plan on a week you can keep up, not the hours you work in your busiest month.

Example: A solo pressure washer wants $60,000 a year in pay and sets aside $15,000 for self-employment tax and health insurance: $75,000 of labor cost. Overhead (truck and rig payments, fuel, insurance, marketing, phone and software) is $25,000; chemicals are priced into each job. Rain and cold days, driving, quoting, equipment repairs and bookkeeping leave 1,250 billable hours a year. Cost per billable hour is $100,000 ÷ 1,250 = $80, and a 20% profit margin makes the rate $80 ÷ 0.80 = $100 an hour on site.

Crews, apprentices and helpers

When people work in pairs or crews, price the crew you'll actually send. Work out each person's labor cost per billable hour, add overhead for each person, and add the results into a crew-hour cost.

Example: An electrical crew is a journeyman whose labor costs $60 per billable hour and an apprentice at $30. With overhead of $40 per billable hour for each person, the crew costs $170 an hour on site: ($60 + $40) + ($30 + $40). At a 15% margin, the crew rate is $170 ÷ 0.85 = $200 an hour. Billing the pair as one person at the journeyman's own rate (about $118) loses money on every hour, and billing both at that rate charges journeyman prices for apprentice work.

On hourly work you can bill separate journeyman and apprentice rates instead. Roofing and solar crews use the same crew-hour cost, converted into a price per square or per watt below.

Turn the rate into the prices customers see

Whatever unit you quote in, the hourly rate is underneath it.

Hourly work

Bill the rate for time on the job, with a minimum charge so a short visit still pays for the trip. Drive time is either billed (as a trip charge) or already inside the rate as nonbillable time; pick one and tell customers before you arrive.

Flat-rate tasks

For repeat service work in HVAC, plumbing and electrical, a flat-rate task price is book hours times your rate, plus parts at your selling price. Use your average tech's time, including setup, testing and cleanup, not your fastest tech's.

Example: At a $140 rate, an HVAC blower motor replacement that takes your techs 1.5 hours on average carries $210 of labor. Add the motor at its $250 selling price and the book price is $460.

Per-unit prices

When you price roofing per square, solar per watt or flatwork per square foot, divide your crew-hour rate by what the crew produces in an hour, taken from your own job records. Materials and the rest of the job go on top; how to price roofing jobs walks through those for a roof.

Example: A roofing crew with a $400 crew-hour rate installs about 4 squares an hour on simple, walkable roofs, by your records. Labor is $400 ÷ 4 = $100 per square. On a steep roof where the same crew manages 2.5 squares an hour, it's $160 per square.

Example: A solar crew with a $300 crew-hour rate takes 20 crew-hours to install a 10 kW system on the roofs it usually works on: $6,000 of install labor, or $0.60 per watt. Track crew-hours per kW by roof type, since attachment time varies with the roof.

Example: The solo pressure washer above, at $100 an hour, cleans about 1,000 square feet of concrete an hour with a surface cleaner. Labor is 10 cents a square foot, with a minimum charge of 2 hours ($200) so small jobs still cover the drive and setup.

Packages

Detailing packages are hours times your rate plus supplies, set by vehicle size and condition. How to price auto detailing covers upcharges and memberships.

Example: At a $70 rate, a full detail that takes 3 hours on a midsize sedan is $210 of labor plus $15 of supplies: $225. The same package on a large SUV that takes 4 hours is $280 plus $20: $300.

Check the rate against finished jobs

A labor rate is a forecast. Each month, compare paid hours with billed hours for every field worker, and use job costing to compare estimated and actual hours by type of job. When flat-rate tasks keep running over their book time, fix the book hours instead of absorbing the difference.

Watch billable hours most closely of all. This is what a shortfall does:

Example: The plumbing shop planned on 1,500 billable hours per plumber. If each bills 1,300 instead, the shop still pays $156,000 for labor and $150,000 for overhead, but bills only 2,600 hours × $120 = $312,000. Profit falls from $54,000 to $6,000, with no change in the rate.

Ways to win back billable hours:

• Group jobs by area so techs drive less between them.
• Stock trucks for your most common jobs so fewer calls need a supply house run.
• Confirm appointments the day before so nobody drives to an empty house.
• Track callbacks by cause and fix the ones that repeat.

Revisit the rate every year

Recalculate at least once a year, and right away when one of these changes:

• Raises, new hires or a change in how you staff crews
• Workers' comp, liability or vehicle insurance renewals
• Payroll tax rates for the new year (ask your payroll provider)
• A new truck, a bigger shop, new software or a bigger marketing budget
• Billable hours running below plan for more than a month or two

When the rate goes up, update your price book first, then give existing customers notice in writing before the new rate takes effect. Honor prices you've already quoted, and if customers are on service agreements, check what the agreement says about price changes at renewal.

Example: A message to an existing customer: "Hi Dana, a quick heads-up from [Company]. Starting March 1, our hourly rate goes from $110 to $120, and our service prices are updated to match. Anything we've already quoted for you stays at the quoted price. We review prices once a year to keep up with wages and insurance. If you have any questions, just reply here."

Mistakes that quietly lower your rate

• Pricing off the wage, or the wage times a rule-of-thumb multiplier
• Dividing by paid hours instead of billable hours
• Leaving your own pay out, or calling it profit
• Counting a cost twice (the truck in both labor and overhead) or not at all
• Copying a competitor's rate, when their costs and billable hours aren't yours
• Setting the rate once and never checking it against real jobs