Guide · Pricing
How to calculate your hourly rate as a contractor
Your rate isn't what you'd earn at a job. It has to pay for the truck, the insurance, and every hour you spend not billing.
Add what you want to pay yourself in a year to what the business costs to run in a year, divide by the hours you can actually bill, and add a margin. Rate = (yearly pay + yearly overhead) ÷ billable hours × (1 + margin). Billable hours are much lower than hours worked: driving, quoting, buying parts and paperwork don't get billed. Most solo contractors who feel underpaid set their rate from what an employee earns and forgot the rest.
The formula, step by step
- Pick your yearly pay. What you want to take home before personal taxes. Be honest; this is the number the rest depends on.
- Add up your yearly overhead. Everything the business pays whether or not you're on a job: truck payment, fuel, insurance, license and bond, phone, tools and their replacement, software, accounting, marketing, and the self-employment taxes an employer would otherwise cover.
- Count your billable hours. Weeks you'll work in a year (leave out vacation, holidays and sick time), times hours a week, times the share of those hours that are on a paying job.
- Divide, then add margin. Pay plus overhead, divided by billable hours, is what you need to break even. Margin on top is what lets the business save for a slow month, a new truck, or a bad customer.
A worked example
| Step | Number |
|---|---|
| Yearly pay you want | $70,000 |
| Yearly overhead (truck, fuel, insurance, tools, phone, software, taxes) | $18,000 (about $1,500 a month) |
| Total to cover | $88,000 |
| Working weeks | 48 |
| Hours a week | 40 |
| Share of hours you can bill | 60% |
| Billable hours a year (48 × 40 × 60%) | 1,152 |
| Break-even rate ($88,000 ÷ 1,152) | $76.39 an hour |
| With a 10% margin | $84.03 an hour, so about $85 |
Example numbers only. Put in your own pay, costs and hours.
Notice what happens if you assume every hour is billable: $88,000 ÷ 1,920 hours is $45.83. That's the rate a lot of new contractors charge, and it's why they're busy all year and still short.
The mistakes that make rates too low
- Copying an employee's wage. An employer pays for the truck, the insurance, half the payroll taxes and the slow weeks. You pay for all of it.
- Assuming 40 billable hours a week. Estimates, driving, supply runs, callbacks and invoicing take real time. If you don't know your share, track one normal week.
- Leaving out the slow season. If winter is half as busy, your billable hours for the year are lower than a good month suggests.
- Pricing materials at cost. Your time to buy, carry and warranty them is real. Many trades add a markup to materials for that reason.
- Never raising it. Fuel, insurance and parts go up every year. Run the numbers again every January.
Hourly or flat price?
Your hourly rate is the foundation either way. Many customers prefer a flat price for the job, and a flat price rewards you for being fast. Estimate the hours, multiply by your rate, add materials, and quote that number. If the job is hard to predict, quote the known part flat and say on the estimate how extra time will be billed.
In Settle you save your labor rate once in your business profile. When you describe a job out loud, Settle prices labor lines with your rate and reuses the prices you've charged before, and marks anything it had to guess so you can check it before sending.
How do I figure out my hourly rate as a contractor?
Add your yearly pay goal and yearly business costs, divide by the hours you can actually bill in a year, and add a margin. For example, $88,000 ÷ 1,152 billable hours is about $76 an hour to break even, or about $85 with a 10% margin.
How many hours a year can a solo contractor bill?
Fewer than you work. If you work 48 weeks of 40 hours and 60% of that time is on paying jobs, that's 1,152 billable hours. Track a normal week to find your own share.
Should I charge by the hour or by the job?
Use your hourly rate to build the price either way. Flat prices are easier for customers to say yes to and reward you for working efficiently; hourly works better when the scope is hard to predict.
How often should I raise my rates?
Recalculate once a year, or whenever a big cost like insurance or fuel jumps. Small yearly increases are easier on customers than a big one every few years.
Put your rate in once and Settle prices every estimate with it.
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