How to Calculate Your True Hourly Rate as a Contractor

Ask ten contractors what they charge per hour and you'll get ten clean numbers. $75. $95. $125. Ask those same ten contractors how they arrived at that number, and most will say something like "that's what guys around here charge" or "that's what I figured I needed."

That's not a strategy. That's a guess. And guessing is exactly why so many capable tradesmen work 60-hour weeks running a business that barely breaks even.

Your hourly rate isn't a marketing decision. It isn't what your competitor charges. It isn't even what your customers expect to pay. Your hourly rate is a math problem with a single correct answer — the number you must charge to cover every dollar of cost in your business and still take home the profit you want.

This guide walks through that math, line by line, with the costs most contractors forget to count. By the end, you'll know your true break-even rate — and the rate you should actually be quoting.

Why most contractors undercharge by $20–$40 per hour

Here's the trap. A new contractor looks at their bills, does some quick math, and figures: "I need to bring in about $4,500 a month to keep the lights on. If I work 40 hours a week, that's 160 hours a month. So I need to charge about $30/hour to break even, plus profit. I'll charge $75 — that's plenty of cushion."

Sounds reasonable. It's also catastrophically wrong. Here's why:

• You don't bill 40 hours a week. You bill maybe 25, on a good week.
• "Personal bills" isn't your overhead. Your business has its own overhead, separate and additional.
• Labor burden gets ignored. Workers' comp, payroll taxes, benefits, vehicle costs — none of these are usually counted.
• "Profit" gets confused with "owner pay." They are not the same thing.

Once you account for these properly, that "$75/hour" contractor is often netting closer to $20/hour after everything is paid. Some are netting negative dollars per hour and don't realize it because the cash flow masks the problem.

Let's fix that with real math.

The four components of your true hourly rate

Your true rate is built from four stacked components. Miss any one of them and your number is wrong.

1. Direct labor cost (what you pay yourself or your tech)

Start with the hourly wage. If you pay a journeyman $35/hour, that's the base. If you're paying yourself, decide what an honest market wage would be for the work you're doing — not what's left over after bills, but what you'd pay someone else to do your job.

Be honest here. If you'd pay a hire $40/hour to do what you do, that's your direct labor cost. Anything less and you're undervaluing the work, which throws off every calculation downstream.

2. Labor burden (the costs on top of wages)

This is where most tradesmen get blindsided. For every dollar of direct wages, you typically pay another 30–45 cents in burden costs. Specifically:

• Payroll taxes: Social Security (6.2%), Medicare (1.45%), federal unemployment (~0.6%), state unemployment (varies — often 2–6%)
• Workers' compensation insurance: Varies wildly by trade and state. Electricians might pay $4–8 per $100 of payroll. Roofers can hit $20+.
• General liability insurance: Typically $50–150/month per worker, allocated
• Health insurance contribution (if offered)
• Retirement match (if offered)
• Paid time off: 2 weeks PTO = ~4% of annual wages you pay but don't bill for
• Tools, uniforms, training

Total burden typically runs 30–45% on top of wages. So that $35/hour journeyman actually costs you $45–$50/hour to put on a job.

3. Overhead (the costs of running the business itself)

These are costs you pay whether or not you swing a hammer that day:

• Vehicle (truck payment, insurance, fuel, maintenance)
• Office or shop rent
• Phone, internet, software subscriptions
• Licensing and permits
• Marketing and website costs
• Accounting, bookkeeping, legal fees
• Tools and equipment (depreciated)
• Bad debts and rework allowance

Add these up annually. For a one-truck operation, you're typically looking at $25,000–$60,000 per year in overhead before you've billed an hour. For a small crew with a shop, $80,000–$200,000+ is normal.

4. Profit (the actual reason you own the business)

This is the part everyone forgets. Profit is not what's left over after bills. Profit is a planned, intentional margin built into every hour.

If you don't build profit into your rate, you don't have a business — you have a job that owns you. Healthy trade businesses target 15–25% net profit after all costs (including paying yourself a market wage as one of those costs).

That means if your cost-to-deliver one billable hour is $80, you should be charging $96–$107 to hit that profit target.

The killer variable: billable hours

Here's the number that destroys most contractors' math: billable hours per week.

A 40-hour work week does not equal 40 billable hours. Not even close. Realistically, a working contractor bills:

• 25–30 hours per week for an established solo operator
• 20–25 hours per week for a newer solo who's still building referrals
• 32–35 hours per week for an employee tech with steady dispatched work

The other 10–20 hours? Driving between jobs, picking up parts, writing estimates, returning calls, invoicing, training, ordering materials, fixing your own equipment, marketing, paperwork. None of it billable. All of it necessary.

Once you accept that you bill maybe 25 hours a week — call it 1,250 hours a year — your hourly rate math changes dramatically.

Worked example: a real solo electrician's number

Let's run actual numbers on a hypothetical solo electrician — call him Mike — who pays himself like an employee, runs one truck, and works full-time.

Mike works 50 weeks a year (2 weeks off). At 25 billable hours per week, that's 1,250 billable hours annually.

His break-even hourly rate: $142,400 ÷ 1,250 = $113.92/hour.

And that's just to break even. To hit a 20% profit target, he needs to charge:

$113.92 ÷ (1 − 0.20) = $142.40/hour

Mike thought he was killing it at $95/hour. He's actually losing money on every job — about $19 per billable hour, which works out to $24,000 in lost potential profit per year. He doesn't realize it because he's still paying himself the $80K wage. But the business itself is bleeding.

What if your market won't pay $142/hour?

This is the honest pushback every contractor has when they see their true number for the first time. "There's no way I can charge that. The guy down the road charges $85."

A few responses to that:

1. The guy down the road is probably going broke too. Most undercharging contractors don't last more than 3–5 years. You only see the survivors and assume their pricing works.
2. Your competition isn't your peers — it's profitable competitors elsewhere. If electricians in similar markets charge $140+ and have full schedules, the market will support it. Your local market may just be undertrained on real pricing.
3. You don't have to advertise the hourly rate. Most successful trades businesses use flat-rate pricing — quoting jobs as a single price rather than time-and-materials. Customers prefer the certainty, and you protect your margins. (More on this below.)
4. If you truly can't charge enough to be profitable in your market, you have the wrong market. That's a hard truth, but it's better to know it than to grind for a decade losing money quietly.

Why flat rate pricing is the answer for most trades

Once you know your true hourly rate, flat-rate pricing becomes the obvious next step. Instead of telling a customer "I charge $142/hour and this might take 2–4 hours," you say "Replacing that panel is $1,850, all-in." The customer gets price certainty. You get margin protection on jobs that go faster than expected.

The trick to flat-rate is having a price book — a pre-priced catalog of every common service you offer, calculated using your real hourly rate. Without one, you're back to guessing on every quote.

The bottom line

Your hourly rate is the foundation that every other number in your business sits on top of. Get it wrong, and you're working hard for poor returns no matter how much you scale. Get it right, and suddenly every quote you send is calibrated for actual profitability.

The math isn't complicated. It just requires honesty about the costs most contractors prefer to ignore. Run the numbers — really run them, all four components — and you'll likely discover you've been undercharging by 30% or more for years.

That's not a reason to feel bad. It's a reason to fix it on the next quote.

Frequently Asked Questions