The hourly rate you charge is one of the biggest factors when determining how much you’ll end up profiting. So it’s super important that you don’t take guesses here and build out a properly made hourly rate. We help contractors grow their businesses and profit more so we’re going to teach you the exact criteria we use for helping them build out good hourly rates.
The first most important concept is that comparing yourself to others is the easiest way to shoot yourself in the foot here. By doing this from the start you make it super easy for your customers to also compare you to others. Instead focus entirely on what you’re good at and what you deliver that others don’t and price yourself around that.
Generally a good rule of thumb to know how your pricing stands is looking at what your customers are doing. If you profit a ton from each customer but you are barely getting any customers, then your price is probably too high. On the other hand if you get in a ton of customers but barely end up profiting, your price is probably too low.
Now that we have the general pricing stuff out of the way let’s get into when to charge an hourly rate and when to charge a flat rate as depending on the situation one is much better than the other.
Hourly rate, when should you use it? If the types of jobs you do tend to vary a ton between customers and are highly unpredictable, hourly rate is the go to. This tends to be very useful on repair jobs but any job that you don’t know exactly how long it will take until you’ve already done it, would be the right one to use hourly on.
For flat rate, this is the complete opposite. If you can easily predict how long the job will take based on the information the customer can provide, like number of rooms, area, quantity, etc. Then charging a flat rate is right for you.
Quick note, you can absolutely do both and in a lot of cases it’s the better option. For example if you do service and install work, charging an hourly rate for your service work and a flat rate for install work is an amazing idea.
Let’s get into actually building out an hourly rate. So the base of your hourly rate depends on your labor costs. The way to calculate this is to figure out on average across all your job types that you’ll charge an hourly rate on, how much does labor cost you per hour. This way we can include jobs that require multiple employees or higher pay employees. We’ll get into what to do for jobs that require a lot of highly paid employees near the end.
With that number acquired, now we can get our base rate set. We recommend pricing at a 60% gross profit margin or higher with the absolute minimum being 50%. Anything lower than that and your business just needs a ton of volume to make the same amount of net profit, just more work for the same pay.
To get that 60% gross profit margin you just need to divide your labor cost/hour by 0.4. This number will be your hourly rate. But there are some other things we need to consider.
The first one is the other costs of servicing that client. Drive time and setup/cleanup time. These are huge as not only are they super time consuming, they are very easily forgotten. The easiest way to cover these costs is to add a service fee. The service fee will replace the first hour of work. So on a 6 hour job, you charge the service fee plus 5 hours of service.
This is how you price out a service fee. Firstly figure out how long you drive to each job on average. Then figure out how long it takes to set up and cleanup on each job on average. With that you can now take that amount of time and figure out how much it costs you based the hourly labor cost you determined before. Now we add those together along with the hourly labor cost and we divide again by 0.4. There you go, now you have your service fee.
Because of the unpredictable nature of jobs that should be charged hourly, there are some other factors we have to consider. Number one is complexity, if a job is very complex, needs more employees, or needs higher pay employees, you should charge more for that. We usually recommend multiplying your hourly rate by a certain number. If that job doubles your hourly labor costs, then double your hourly, if it only increases it by 1.3x then just multiply your hourly rate by 1.3x.
If you do after hours calls or emergency calls, you can absolutely charge a fee for those as well. Anything from 1.2x to 1.8x your hourly rate is a good idea here, use the guidelines from the first example to determine where to price this fee. You can also just use this multiplier on the service fee and not on every hour after that.
Well that’s how you calculate your hourly rate so that you can profit at prices that people are willing to pay for. If you need more help determining your hourly rate or you want us to determine it for you, you can book an appointment with us here: https://www.woopenvironmental.com/book
Always so helpful! Very responsive. Super professional. Great information and advice for growth!!!