How to calculate labour cost per hour you can bill

What goes into labor cost

The figure you end with is the labour rate each job has to carry before overhead and profit.

Labor cost is the full amount a worker costs your business for each hour of billable work. It always sits well above the wage, because you also pay payroll taxes, workers’ compensation premiums, benefits and paid days off, and because nobody bills every hour they are paid for.

Keeping the two apart matters because they are recovered differently. Labor cost follows the person and the hours on a job. Overhead is spread across every billable hour in the business, which the guide to working out overhead per hour covers.

Step 1: add up what one worker costs in a year

Start with a full year rather than an hour. A year catches the costs that arrive in lumps, such as benefit renewals, workers’ compensation and paid holidays, which an hourly figure hides. The table builds the annual cost of a lead carpenter paid $28.00 an hour for 2,080 paid hours, which is 40 hours a week for 52 weeks.

The 9% and 5% are placeholders, not averages. Replace them with the payroll tax rates for your country and state and the rate on your own workers’ compensation premium notice; your payroll provider or accountant has both.

The extra over wages is called labor burden. Here it is $72,393.60 minus $58,240.00, or $14,153.60, which is 24.3% of the base wage.

Step 2: count the hours you can actually bill

Divide by billable hours, never by paid hours. Paid hours include holidays, vacation, rain days, driving between jobs, collecting materials and time in the shop. Divide by all 2,080 and your labor cost looks lower than it is, and the shortfall comes out of profit on every single job.

Measure your own billable share from timesheets. Take one month, total the hours charged to jobs and divide by the hours you paid. Repeat for three months and use the average; it beats any rule of thumb.

Step 3: divide to get labor cost per hour

Labor cost per hour is the annual labor cost divided by billable hours. For the carpenter, $72,393.60 ÷ 1,568 comes to $46.17 per billable hour. That is what one hour of their time on your quote really costs before a single dollar of overhead or profit is added.

Wage

$28.00 per hour

Loaded cost per paid hour

$34.80 ($72,393.60 ÷ 2,080)

Labor cost per billable hour

$46.17 ($72,393.60 ÷ 1,568)

The middle figure is the trap. $34.80 feels like the true cost, but it assumes every paid hour gets billed. The difference of $11.37 per hour is the price of time no customer pays for.

A helper on $20.00 an hour, built the same way with $2,400 of benefits and a $600 allowance, costs $50,424.00 a year. Over the same 1,568 billable hours that is $32.16 per hour.

Step 4: turn labor cost into an hourly rate for contractors

Your charge out rate is labor cost plus overhead per hour plus profit. With overhead at $18.50 per billable hour and a 15% profit margin, the carpenter’s $46.17 becomes $64.67 of total cost and a labor rate of $76.08 an hour, which rounds to $76 on the quote.

1. Start from labor cost$46.17 per billable hour, from step 3.
2. Add overhead per hour$46.17 + $18.50 = $64.67. The $18.50 is an example figure; yours comes from your own overhead budget.
3. Add profit as a margin$64.67 ÷ (1 minus 0.15) = $64.67 ÷ 0.85 = $76.08.
4. Round and repeat for each roleCarpenter $76 an hour. The helper works out at ($32.16 + $18.50) ÷ 0.85 = $59.60, so $60.

Dividing by 0.85 gives a true 15% margin. Multiplying $64.67 by 1.15 instead gives $74.37, which is only a 13.0% margin. The markup and margin guide explains why, and the markup calculator converts one into the other.

Working alone, treat your own pay the same way. Pick a salary, add the taxes and benefits you fund yourself, and divide by the hours left after quoting, buying and bookwork. A $65,000 salary plus $6,000 of self-paid health and retirement over 1,400 billable hours is $71,000 ÷ 1,400 = $50.71 per hour of labor cost.

Step 5: calculate labor cost for a job

For one job, list each task, who does it and how long it takes, then multiply by that person’s labor cost per hour. In this example a lead and a helper hang and finish drywall in a 12 × 14 ft bedroom, including the return visits needed while joint compound dries between coats.

On the quote, the same hours at charge rates come to 14 × $76 = $1,064 for the lead plus 8 × $60 = $480 for the helper, so $1,544 of labor. Take away $903.66 of labor cost and $407.00 of overhead (22 × $18.50) and $233.34 is left as profit, a 15.1% margin.

Put those hours on a quote

Add a Labor group, set the unit to hrs and type your rate. Subtotals, tax and the deposit follow.

Open the quote maker

Labor costing mistakes that shrink your margin

Most labor pricing errors come from leaving something out, not from bad arithmetic. Check your rate against this list before it goes on a quote, and rebuild it every time wages, premiums or your billable share change, because an old rate quietly costs you on every job.

• Quoting the wage as the cost. In the example, $28.00 is only 61% of the real $46.17.
• Dividing the annual cost by 2,080 hours as if every paid hour were billed.
• Forgetting the return trips on work that has to dry, cure or wait for an inspection.
• Using one blended rate for a crew with very different wages, then sending the dearest person to the cheapest jobs.
• Leaving the rate alone after a raise. A $2.00 raise for the carpenter adds $3.02 per billable hour once payroll tax and workers’ compensation follow it.
• Pricing rush or weekend work at the normal rate. Put the overtime premium on its own line.

Once the rate is right, the rest of the price follows. The guide on pricing a whole job adds materials, equipment and profit, and a rate card keeps your hourly rates consistent from one quote to the next.