RHACOVA

Financial fundamentals

What Is Cost per Productive Hour?

It is the number a billable rate has to beat. Wage is not it, and loaded labor cost alone is not it either.

The short answer

Cost per productive hour is what one hour of billable field work actually costs your business: loaded labor cost for that hour, plus the overhead you assign to it, plus any other per-hour cost you carry. It is a cost, never a price. The rate you charge is this number plus the margin you intend to keep.

Definitions

Paid hours
Every hour you pay for in a year, including holidays, training and shop time.
Productive hours
The hours actually worked on jobs. Only these hours can carry cost into a price.
Loaded labor cost
Wage plus labor burden — taxes, insurance, benefits and employer-paid costs. See how to calculate labor burden.
Cost per productive hour
Loaded labor cost per productive hour + overhead assigned per hour + other cost per hour.

The formulas

Productive hours = paid hours − non-productive hours

Loaded cost per productive hour = total annual labor cost ÷ productive hours

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

Worked example

A $30/hour employee with 10% payroll taxes, 8% workers' compensation, $6,000 of annual benefits and $1,200 of other employer costs, paid for 2,080 hours with 260 of them non-productive:

  • Total annual labor cost: $80,832.00
  • Burden rate on wage: 29.54%
  • Productive hours: 1820
  • Cost per paid hour: $38.86
  • Cost per productive hour: $44.41

The wage was $30. The hour costs materially more than that, and the difference between the paid-hour and productive-hour figures is money that only comes back through the hours you bill.

Add overhead and a target margin and the same hour becomes a rate:

  • Loaded labor cost: $38.40
  • Overhead per hour: $22.00
  • Other cost per hour: $3.00
  • Cost per productive hour: $63.40
  • Selling rate at a 20% margin: $79.25
  • Profit per hour: $15.85

Why the denominator decides everything

Every fixed cost in the business is divided by productive hours. Overstate those hours and every per-hour cost lands too low, which means the rate built on it is too low on every job for the whole year. Which hour count to use, and why billable and productive are not the same, is the subject of billable hours vs productive hours.

Common mistakes

  • Dividing annual cost by 2,080 hours as if none of them were unbillable.
  • Treating cost per productive hour as a rate you can quote.
  • Adding overhead here and again as a percentage markup later, charging for it twice.
  • Leaving the owner's field hours out of the hour count entirely.

Quick answers

Is cost per productive hour a price?
No. It is cost. A price is that cost plus the margin you intend to keep — the two must never be the same number.
Why divide by productive hours instead of paid hours?
Because you can only bill productive hours. Costs spread over hours you cannot bill will never be recovered.

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.

Set your default rate once

Your Numbers holds your loaded labor cost and billable rate as company defaults, so every new estimate starts from the hour's real cost.

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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