A busy shop can still lose money, and the hourly rate is usually where it starts. You pay a tech $28 an hour, so you bill $75 and figure you are clearing $47. Then the truck payment, the insurance, the phone, and the twelve hours a week you spend quoting all come out of that $47 — and the "profit" is gone. How to calculate your hourly rate for a service business is not a guess or a market average. It is your real overhead divided by the hours you can actually bill, plus loaded labor, plus the margin you want to keep. Build it in that order and the rate holds.
Why 'what should I charge' is really three questions
The question feels like one number, but it hides three, and skipping any of them is how the rate ends up too low.
- What does an hour of work cost me to sell? — your loaded labor plus a slice of overhead. This is the floor. Charge under it and every hour loses money.
- How many hours can I actually bill? — not the hours your crew is on the clock. The gap between the two is the number most rate guides ignore.
- What do I want to make on top? — target margin. This is the only part that is a choice; the first two are arithmetic.
Get the first two right and the third one has something real to sit on. Get them wrong and you are marking up a fantasy.
What counts as overhead (and what everyone forgets)
Overhead is every cost that keeps the business running but cannot be traced to one specific job. Rent, the truck payment, fuel that is not billed to a ticket, insurance, software, the phone, advertising, and your own time in the office all count. So does the part almost everyone forgets: the unbilled hours you and your crew spend quoting, driving, buying parts, and chasing invoices. If a cost happens whether or not you land the next job, it is overhead.
The line item owners skip
Your own labor is overhead, too. If you spend 15 hours a week quoting and running the office instead of turning a wrench, that time has a cost even though no customer is billed for it. Leave it out and your rate is subsidized by your unpaid nights — until you burn out or hire someone and the math collapses.
To calculate overhead costs for a service business, add up twelve months of these fixed and semi-fixed costs and divide by twelve. That is your monthly overhead — call it $8,000 for a two-tech shop in the example below. It is not a number you have an opinion about; it is what left your bank account for things that were not job materials.
The billable-hour reality: 60–70%, not 100%
Here is the number that sinks most rate calculations. A tech on the clock 40 hours a week does not sell 40 billable hours. Some of that time is driving between jobs, some is loading the truck and hitting the supply house, some is the callback that was not chargeable, some is standing around waiting on a customer or a part. Real billable efficiency for field service runs about 60–70% of paid time. A tech paid for 40 hours typically bills 24–28.
This matters because you recover overhead only on the hours you actually bill, not the hours you pay for. Price your rate off 40 billable hours a week and you have set it about 40% too low without noticing — the shop stays busy, the crew is always working, and the bank account never grows.
Count real billable hours, not scheduled ones
Track a few weeks honestly: paid hours in, billed hours out. If your techs bill 26 of 40, your billable efficiency is 65%. Use that number, not 100%, everywhere below. If you have never measured it, start at 65% — you can tighten the estimate once you have real data.
Overhead per hour, done properly
Now the two numbers meet. Take monthly overhead and divide it by the billable hours your shop actually sells in a month — not the hours it pays for.
Total the paid hours
Two techs at 40 hours a week, about 4.3 weeks a month, is roughly 344 paid hours.
Apply real billable efficiency
At 65%, those 344 paid hours become about 224 billable hours a month. That is the number that recovers overhead.
Divide overhead by billable hours
$8,000 monthly overhead ÷ 224 billable hours ≈ $36 of overhead per billable hour.
Use the fantasy number instead — 344 hours as if every paid hour were billable — and you land at $23 of overhead per hour, under-recovering by $13 every hour, all year. On 224 billable hours a month that is about $2,900 of overhead you never charged for.
Loaded labor cost and your break-even rate
A tech you pay $28 an hour does not cost you $28 an hour. Add payroll taxes, workers-comp, unemployment insurance, and any benefits, and the fully-loaded cost is usually 25–40% higher — call it $36 for this example. That loaded figure is what an hour of that tech actually costs your business.
Stack loaded labor and overhead per hour and you have your break-even hourly rate — the number below which the work loses money before you have made a cent.
- Loaded labor: $36 per hour.
- Overhead per billable hour: $36 per hour.
- Break-even rate: $72 per billable hour. Bill exactly this and you have covered the crew and the office and kept nothing.
Adding target margin to get your rate
Break-even keeps the lights on; margin is what the business runs on — the slow month, the next truck, and your pay. The trap here is the same one that wrecks job pricing: marking up is not the same as making margin. To keep 40% margin you divide by 0.60, you do not multiply by 1.40.
Rate = break-even ÷ (1 − target margin). At a 40% target: $72 ÷ 0.60 = $120 per hour. A 40% markup instead would have given you $101 — and left you with only about 29% margin. The gap between $101 and $120 is the difference between thinking you are profitable and being profitable.
Markup is not margin
Adding 40% to a $72 cost gives $101, which is a 29% margin — not 40%. Divide cost by (1 − margin) instead. This one swap is the most common reason a shop that "adds a healthy markup" still comes up short at year-end.
A full worked calculation
- 1.Monthly overhead, twelve-month average: $8,000.
- 2.Paid hours per month, two techs: ~344.
- 3.Real billable efficiency at 65%: ~224 billable hours.
- 4.Overhead per billable hour ($8,000 ÷ 224): ~$36.
- 5.Fully-loaded labor cost: $36/hour.
- 6.Break-even rate (overhead + loaded labor): $72/hour.
- 7.Rate at 40% target margin ($72 ÷ 0.60): $120/hour.
That $120 is a floor you built from your own numbers, not a rate you copied off a competitor. You can charge above it for a rush, a hard-access site, or premium work — and you should. What you should not do is drop below it to win a bid, because now you know exactly what that bid costs you. Most maturing shops eventually stop quoting hourly at all and price flat-rate off this same cost stack, which protects the margin from every job that runs long. The method is the same; see how to price a service job for the per-job version.
The rate only works if you check it against reality. When your quotes, invoices, and books all trace to one record, you can see your actual margin per job instead of trusting the spreadsheet you built in January. That is the point of reading your numbers straight from the work — walk through it in how to read your profit and loss statement, and see how the pieces connect in Mortar.
How do I calculate my hourly rate for a service business?
Add your fully-loaded labor cost per hour (wage plus payroll taxes, insurance, and benefits) to your overhead per billable hour (total monthly overhead ÷ the hours you actually bill). That sum is your break-even rate. Then divide by (1 − your target margin) to add profit. The step most people miss is using real billable hours, not the hours you pay for.
How many billable hours can a technician actually sell?
Fewer than you think. A tech on the clock 40 hours a week typically bills 24–28 — roughly 60–70% billable efficiency — because driving, loading, supply runs, callbacks, and waiting are all paid but not billed. Price your rate off 40 billable hours and you have set it about 40% too low.
What is a break-even hourly rate for a contractor?
It is loaded labor cost per hour plus overhead per billable hour — the rate at which an hour of work covers the crew and the office and nothing more. In the worked example above it is $72/hour. Anything you charge below that loses money before you add materials or profit.
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