How to Calculate Your Charge-Out Rate
What Is a Charge-Out Rate?
Your charge-out rate is the amount you need to charge a customer for your labour in order for your business to cover its costs and make a worthwhile profit.
It is not simply the hourly wage you would like to earn.
That distinction is one of the most important things to understand when running a trade business.
A tradesperson may decide:
“I want to earn £25 per hour, so I will charge customers £30 or £35 per hour.”
Unfortunately, that calculation ignores most of the cost of running the business.
Your charge-out rate needs to contribute towards much more than your personal wage. It may also need to cover:
Vehicle costs
Fuel
Insurance
Tools and equipment
Accountancy
Telephone and internet
Advertising
Software
Workwear
Training
Certification
Professional memberships
Administration time
Holidays
Sick days
Bank holidays
Time spent preparing quotations
Time travelling between jobs
Unproductive time
Business profit
If these costs are not included somewhere in your pricing, they eventually come out of your own pocket.
That is why understanding your true charge-out rate is essential.
[INTERNAL LINK: Trade Profit App – Calculate Your True Business Costs]
Your Wage Is Not Your Charge-Out Rate
Imagine you would like to earn the equivalent of £30 per hour.
Charging a customer £30 per hour will not give you a £30-per-hour income.
You still have to pay the expenses associated with running your business.
Even charging £40 per hour may not be enough if the business has significant overheads.
This is where many self-employed tradespeople get caught out.
Employees generally do not have to personally pay for the van they drive to work, business insurance, advertising, accountancy, tools, software or time spent finding their next job.
A self-employed tradesperson does.
Your charge-out rate therefore needs to be considerably higher than the hourly income you ultimately want to take from the business.
Step 1: Decide What You Want to Earn
Start by deciding what you reasonably want the business to provide for you.
For example, suppose you want an annual personal income of:
£40,000
This gives you a starting point.
However, you cannot simply divide £40,000 by 52 weeks and then by 40 hours.
You are unlikely to have 52 full working weeks available to charge customers.
You need to allow for holidays, bank holidays, sickness and other non-working periods.
For example, you might base your calculation on:
46 working weeks per year
If you work 40 hours per week:
46 × 40 = 1,840 working hours
At first glance:
£40,000 ÷ 1,840 = £21.74 per hour
But this is still nowhere near your correct customer charge-out rate.
We have not yet allowed for business overheads or non-billable time.
Step 2: Work Out Your Annual Business Overheads
Every business has overheads.
Some are obvious. Others are easily forgotten.
Typical annual overheads for a trade business might include:
Vehicle insurance
Vehicle tax
Servicing and repairs
Fuel
Public liability insurance
Employers' liability insurance where applicable
Tool insurance
Accountancy
Bookkeeping
Banking charges
Mobile telephone
Internet
Website costs
Advertising
Trade association membership
Certification
Training
Software subscriptions
Tools and replacement equipment
Workwear
PPE
Office costs
Suppose your total annual business overheads are:
£18,000
If your target income is £40,000, the business now needs to generate at least:
£40,000 + £18,000 = £58,000
And we still have not added profit.
[INTERNAL LINK: How Overheads Affect What You Need to Charge]
Step 3: Do Not Assume Every Working Hour Is Billable
This is another major pricing mistake.
If you work 40 hours per week, you are extremely unlikely to invoice customers for all 40 hours.
Some of your time will be spent:
Driving
Preparing estimates
Buying materials
Answering telephone calls
Sending emails
Preparing invoices
Following up customers
Carrying out bookkeeping
Cleaning the van
Maintaining tools
Ordering materials
Dealing with suppliers
Marketing the business
Visiting jobs you do not win
All of this work is necessary.
But customers are rarely invoiced directly for every minute of it.
That means your productive or billable hours are lower than your actual hours worked.
Suppose you work 40 hours per week but only manage to charge customers for an average of 30 hours.
Over 46 weeks:
30 × 46 = 1,380 billable hours
Your £58,000 income requirement therefore needs to be recovered from those 1,380 hours.
£58,000 ÷ 1,380 = £42.03 per billable hour
Already your required rate has increased substantially.
And we still haven't added a business profit margin.
Step 4: Add Profit
There is an important difference between earning a wage and making a profit.
You should ideally receive an income for the work you perform.
The business should then make a profit on top.
Profit allows the business to:
Build cash reserves
Replace vehicles
Purchase equipment
Survive quieter periods
Invest in marketing
Employ people
Expand
Deal with unexpected expenses
If the business only generates enough money to pay your personal wage and its bills, you have effectively created a job for yourself rather than a strong business.
Suppose you decided that your pricing should provide an additional 15% contribution towards profit.
Using the previous example:
£42.03 × 1.15 = £48.33 per hour
You might therefore decide on a charge-out rate of around:
£50 per hour
That is very different from the £21.74 per hour figure we arrived at when we simply divided the desired £40,000 income by the theoretical working hours.
This illustrates why simply copying someone else's hourly rate can be so dangerous.
Step 5: Include Vehicle Costs Properly
For many tradespeople, the vehicle is one of the largest business expenses.
Yet vehicle costs are frequently underestimated.
It is easy to think only about fuel.
Your actual vehicle costs may include:
Purchase or finance payments
Depreciation
Insurance
Road tax
MOT
Servicing
Repairs
Tyres
Breakdown cover
Fuel
Parking
Cleaning
Replacement costs
A van costing several hundred pounds each month needs to be paid for through the jobs you complete.
If your vehicle costs £10,000 per year and you complete 500 jobs, the average vehicle cost is already:
£10,000 ÷ 500 = £20 per job
And that is before considering how far you travel for individual jobs.
Trade Profit App allows business costs such as these to form part of the overall pricing calculation rather than being forgotten.
[INTERNAL LINK: Trade Profit App Vehicle Cost Calculator]
Step 6: Allow for Administration
Administration is another hidden cost.
A customer may see you completing eight hours of work on site.
They may not see:
30 minutes discussing the work beforehand
45 minutes preparing the quotation
30 minutes ordering materials
20 minutes producing the invoice
Time answering messages
Time collecting materials
A supposedly eight-hour job might actually require ten or eleven hours of your business time.
If your pricing only covers the visible site hours, the rest of your time is effectively unpaid.
One solution is to include an administration allowance within your charge-out rate.
Another is to recover some administration costs through your job pricing.
What matters is that the cost is included somewhere.
Step 7: Remember That Materials Are Separate
Your charge-out rate normally relates primarily to labour and business costs.
Materials should usually be calculated separately.
Materials may also need an appropriate mark-up.
If you purchase £1,000 of materials and simply charge the customer £1,000, you have received no payment for:
Ordering them
Collecting them
Checking deliveries
Returning incorrect items
Handling warranties
Financing the purchase
Taking the risk of price changes
A suitable material mark-up helps compensate the business for providing these services.
[INTERNAL LINK: How to Price Materials Correctly]
Why You Shouldn't Simply Copy Competitors
A common question among tradespeople is:
“What is everyone else charging?”
It is useful to understand local market prices.
But competitor prices should not determine your own charge-out rate.
Two electricians working in the same town might have completely different business costs.
One may:
Own their van outright
Work from home
Have very few overheads
Work alone
The other may:
Have vehicle finance
Rent a workshop
Employ an apprentice
Use several software subscriptions
Spend heavily on advertising
They cannot necessarily charge exactly the same rate and achieve the same profit.
The same applies across plumbing, heating, carpentry, decorating, building, roofing and other trades.
Your price needs to work for your business.
Should You Tell Customers Your Hourly Rate?
Not necessarily.
Having a calculated charge-out rate does not mean every quotation needs to show:
“Labour: 14 hours at £50 per hour.”
For many jobs, a fixed price is preferable.
You might calculate internally that the work will require:
14 hours × £50 = £700 labour
You then add:
Materials
Material mark-up
Specialist equipment
Subcontractors
Additional expenses
Contingency where appropriate
The customer may simply receive a total quotation.
Your charge-out rate is therefore an internal pricing tool.
It helps you build a profitable price.
The customer does not necessarily need to know every calculation behind it.
[INTERNAL LINK: How to Quote Like a Professional]
What About Day Rates?
Many tradespeople prefer to quote a day rate.
That is perfectly reasonable.
But the day rate should ideally be derived from your calculated hourly rate rather than guessed.
If your required charge-out rate is £50 per hour and you expect to achieve seven productive hours in a working day:
£50 × 7 = £350 per day
However, you may need to charge more depending on travelling time, job type and other circumstances.
A day rate can make pricing easier, but it does not remove the need to understand the figures behind it.
Don't Forget a Mate or Apprentice
If another person works with you, their cost is not simply their hourly wage.
An employee may involve additional costs such as:
Employer National Insurance
Pension contributions
Holiday pay
Sick pay
Training
PPE
Tools
Insurance
Administration
You therefore need to know their true cost to the business.
If a mate costs the business £18 per hour in total, charging the customer £18 per hour for them makes no profit.
Their customer charge-out rate needs to reflect both their employment cost and a contribution towards overheads and profit.
Review Your Charge-Out Rate Regularly
Your charge-out rate should not be calculated once and then forgotten for five years.
Costs change.
Fuel increases.
Insurance increases.
Vehicle costs rise.
Software subscriptions change.
Wages increase.
Materials become more expensive.
Your own financial requirements may also change.
Review your pricing at least annually.
It is also sensible to review it whenever there is a major change in your business.
For example:
Buying a new van
Taking on premises
Employing someone
Increasing advertising
Purchasing expensive equipment
A rate that was profitable two years ago may no longer be profitable today.
What Happens If the Calculated Rate Seems Too High?
This is an important question.
You might calculate that you need to charge £55 per hour but believe competitors are charging £40.
Do not automatically reduce your figure to £40.
First investigate why there is a difference.
Are your overheads too high?
Are you losing too many hours to administration?
Are you travelling too far?
Are you not charging enough for call-outs?
Could you organise materials more efficiently?
Are competitors actually charging more than you think?
Are they adding margins elsewhere?
Or are some competitors simply underpricing?
Being cheaper than an unprofitable competitor is not a sensible business strategy.
Sometimes the calculation reveals a problem with your business model that needs fixing.
That is useful information.
Your Charge-Out Rate Is Only the Starting Point
Knowing your charge-out rate does not mean every job should be priced using exactly the same formula.
Some work carries greater risk.
Some jobs require specialist skills.
Some require expensive equipment.
Some involve difficult access.
Some take place outside normal working hours.
Some customers require considerable administration.
Your standard charge-out rate provides the foundation.
You can then adjust your final price to suit the circumstances of the job.
Calculate Instead of Guessing
Many tradespeople are excellent at their trade but have never been shown how to calculate what their business actually needs to charge.
As a result, pricing is often based on:
Guesswork
Competitor prices
Old hourly rates
What feels reasonable
What they think the customer will accept
That can work for a while.
But it makes it difficult to know whether the business is genuinely profitable.
A better approach is to start with your actual business costs.
Enter the costs you know.
Use reasonable estimates where necessary.
Review them as better information becomes available.
Then calculate what the business needs to recover from its jobs.
That is the principle behind Trade Profit App.
Rather than simply asking, “What should I charge?”, the app helps you work from the costs of running your own business.
You can enter your known business costs or start with national-average figures and edit them later as you build a clearer picture of your actual expenses.
[INTERNAL LINK: Try Trade Profit App]
Final Thoughts
Your charge-out rate is one of the most important numbers in your trade business.
Get it wrong and you can be busy every day while still struggling to make money.
Get it right and every job has a better chance of contributing towards:
Your income
Your overheads
Your future business costs
Your profit
The key is to stop thinking of your charge-out rate as simply “what I want to earn per hour.”
Instead, think of it as:
The amount your business needs to recover for each productive hour in order to pay all its costs, pay you properly and make a profit.
Once you understand that figure, quoting becomes far easier.
And, more importantly, you can make pricing decisions based on numbers rather than guesswork.
Try Trade Profit App
Trade Profit App is designed to help tradespeople understand their real business costs and build more realistic, profitable prices.
Enter the costs you already know, use editable average figures where you don't yet have exact information, and adjust them as your business develops.
Try Trade Profit free for three months. No credit card required.
[BUTTON/LINK: Try Trade Profit App]