RHACOVA

Pricing and margin

How to Calculate Your Contractor Hourly Rate

A sustainable hourly rate is built, not picked. Four layers stack up: wage, burden, overhead, then the margin that pays you for the risk.

The short answer

Build the rate in layers instead of picking a number. Start with the wage, add labor burden to get the loaded labor cost, add the overhead each productive hour has to recover, add any other cost per hour, and you have your cost per productive hour. Only then apply a target margin to reach the rate you charge. The margin is applied to the cost per hour, so a 20% target margin means dividing that cost by 0.80 — not adding 20% to it.

The four layers

1. Wage
What lands on the employee's paycheck — or what you would have to pay someone to do your work, if the hour in question is yours.
2. Loaded labor cost
Wage plus labor burden: taxes, workers' comp, benefits and employer-paid costs, spread over billable hours.
3. Overhead per hour
The share of annual overhead each productive hour has to carry.
4. Target margin
The profit you intend to keep, expressed as a share of the rate you charge.

The formulas

Loaded labor cost per hour = wage × (1 + burden rate)

Cost per productive hour = loaded labor cost + overhead per hour + other cost per hour

Selling rate = cost per productive hour ÷ (1 − target margin)

Profit per hour = selling rate − cost per productive hour

The third formula is the one that gets mangled. Dividing by (1 − margin) is what produces the intended margin; multiplying by (1 + margin) produces a markup and a smaller margin than you wanted. That distinction is the whole subject of markup vs margin.

Worked example

A $30/hour employee with 28% burden, $22 of overhead per productive hour, $3 of other cost per hour, at a 20% target margin:

  • Wage: $30.00
  • Loaded labor cost: $38.40
  • Cost per productive hour: $63.40
  • Selling rate: $79.25
  • Profit per hour: $15.85
  • Margin 20.00% — markup 25.00%

Three numbers, three meanings: $63.40 is what the hour costs you, $79.25 is what the customer pays, $15.85 is what the company keeps. Collapsing them into one "rate" is how a busy schedule ends up funding nothing.

Billable hours decide the whole answer

Two contractors with identical costs need different rates if one bills 1,800 hours a year and the other bills 1,200. Fixed costs do not shrink when the schedule thins out; they concentrate into fewer hours. This is why a rate copied from another company tells you almost nothing — their denominator is not yours.

It is also why the honest version of "my rate is too high to win work" is usually "my billable hours are too low". Raising utilisation lowers the required rate without touching a single cost.

Common mistakes

  • Setting the rate from what competitors charge, then discovering their cost base differs.
  • Multiplying cost by 1 + margin instead of dividing by 1 − margin.
  • Leaving the owner's own hours out of the cost, then wondering where the money went.
  • Assuming every paid hour is billable.
  • Quoting one blended rate for a crew whose members have very different burden and skill costs.

Quick answers

Should my hourly rate be based on my wage?
Only as the first layer. A rate built on wage alone ignores burden, overhead and profit, and it will not keep the company solvent.
How do billable hours affect the rate?
Fewer billable hours mean the same fixed costs are spread over fewer hours, so the required rate rises. Billable hours belong in the calculation, not in the optimism.

Run the numbers

Wage, loaded labor cost, overhead per hour, cost per productive hour, selling rate, profit per hour, margin and markup.

Open the Contractor Hourly Rate Calculator

Free, no account, and the answer stays on the page.

Make the rate your default

Save the rate as your default billable rate in Your Numbers, and new estimates start from it instead of from a number you reinvent per quote.

Open Your Numbers

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

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