Most plumbers and electricians set their hourly rate the same way: call two competitors, split the difference, add five dollars. That number has nothing to do with what your business actually costs to run, which is why so many busy shops end the year with nothing in the account.
There is a formula. It takes about twenty minutes and a bank statement. Here it is, with real arithmetic you can check line by line — then swap in your own numbers.
Step 1: Count your billable hours, not your working hours
This is where nearly everyone goes wrong. A full-time year looks like 2,080 hours (52 weeks x 40). Take out two weeks of vacation and six holidays and you are at 1,952 hours.
But you do not bill 1,952 hours. You bill the hours your wrench is actually turning on a customer's job. Everything else — driving, parts runs, quoting, invoicing, chasing payment, sitting in the truck writing a message to a customer who wants an update — is unpaid.
For a one-van operation, the honest billable share is usually somewhere between 55% and 70%. Take 60%:
1,952 x 0.60 = 1,171 billable hours a year.
If you have never measured this, do not guess it for long. Write down your start and stop times on jobs for two weeks. Most people find their real number is lower than their optimistic one.
Step 2: Add up a year of overhead
Overhead is every dollar that leaves the business whether or not you work today. Not materials — those get billed to the job. A realistic one-van list:
- Truck payment, fuel, insurance, maintenance: $9,600
- Liability insurance and workers' comp: $3,600
- License, bond, continuing education: $800
- Phone, software, website, invoicing: $1,200
- Tools, replacements, consumables: $2,400
- Accountant and bookkeeping: $900
- Advertising and lead fees: $1,800
- Everything else — uniforms, dump fees, bank charges: $1,700
Total overhead: $22,000 a year.
Pull these from twelve months of bank and card statements, not from memory. The "everything else" line is always bigger than people expect.
Step 3: Decide what you are paying yourself
Write down a real wage, the one you would have to pay a competent journeyman to replace you, plus a little for the fact that you also run the business. Say $75,000.
This is a cost, not what is left over. If it is the leftovers, you are the charity funding your own company.
Step 4: Do the division
Break-even rate = (overhead + your pay) divided by billable hours:
($22,000 + $75,000) / 1,171 = $82.84 per hour.
That is break-even. At $82.84 an hour, every bill gets paid and you take home $75,000, and the business makes exactly nothing. No profit means no new van, no cushion for a slow February, nothing to absorb a job that goes sideways.
Step 5: Put profit on top — as a divisor, not an add-on
If you want a 10% net margin, you do not add 10%. You divide by 0.90, because the profit has to be 10% of the final price, not 10% of your costs:
$82.84 / 0.90 = $92.04 per hour.
Round it to $95. That is your shop rate. Adding 10% instead would have given you $91.12 — close, but it quietly under-recovers, and the gap widens the higher your target margin goes.
The lever nobody uses: billable ratio
Look at what happens if you claw back admin time and move your billable share from 60% to 68%:
1,952 x 0.68 = 1,327 billable hours. $97,000 / 1,327 = $73.08, divided by 0.90 = $81.20 an hour.
That is almost eleven dollars an hour of headroom — $92.04 down to $81.20 — bought with nothing but eight percentage points of your week. You can take it as a lower, more competitive rate, or keep the rate and take the difference home. Either way it is worth more than most price increases, and it is entirely inside your control.
Eight points of 1,952 hours is roughly 156 hours a year, or three hours a week. That is the quoting, the invoicing, the review replies, the "just checking in" messages. It is not a small pile.
Turning the rate into a flat price
Most customers do not want an hourly number, they want a price. Use the rate as the engine underneath:
- Estimate the labor honestly: say 3.5 hours.
- Labor: 3.5 x $95 = $332.50
- Materials at cost: $140
- Materials markup at 35%: $140 x 1.35 = $189
- Quoted price: $332.50 + $189 = $521.50, call it $525
If the job takes four hours instead of three and a half, you absorb it. If it takes three, you keep it. Over a year that evens out — as long as your hour estimate is honest and your rate is right.
Sanity checks before you publish the number
- Does it survive a slow month? Run the same math at 45 billable weeks instead of 48 and see what happens.
- Does it cover a callback? A free return visit costs you two hours of capacity, not zero dollars.
- Is your materials markup separate? If you are funding your overhead out of parts markup, one manufacturer price change can wipe it out.
- Recalculate it once a year. Insurance and fuel move. Your rate should move with them.
The point of doing the arithmetic is not to arrive at a bigger number. It is to be able to say the number out loud without flinching, because you know exactly what is behind it. When a customer pushes back, "that's our rate" is a weak answer. "That covers a licensed, insured van on your driveway with the right parts on it" is a better one, and it is true.
Flint drafts the quotes, invoices and customer messages that eat your billable hours — try it free at ask-flint.com.