How to work out your charge-out rate

Why a rate copied from someone else rarely works

It is tempting to charge what the bloke down the road charges, or what an online cost guide says. Those numbers belong to someone else's business: their van, their insurance, their hours on the tools and how much of their week goes on quoting and driving. If your costs are higher or your billable hours lower, the same rate quietly pays you less.

Working it out yourself takes half an hour with last year's figures from your bookkeeper or accounting software. You end up with a rate you can explain, and a number to come back to when costs go up.

Step 1: what you need to earn

Start with the wage you want to pay yourself for a year, the same as you would pay a good employee in your trade with your experience. If you run the business through a company and pay yourself a wage, include the super you pay on it too.

If you have staff, work out the full cost of each person you pay for, not just their hourly wage: super, workers compensation insurance, leave, training, uniforms and their share of tools and vehicles. Each person on the tools needs their own charge-out rate, or a crew rate built the same way.

Step 2: what the business costs to run

Add up a year of costs that are not materials for a particular job. Your profit and loss report from last year is the quickest place to find them.

Step 3: the hours you can really bill

This is where most rates go wrong. A year has 52 weeks, but you will not bill 52 weeks of 38 hours. Take off annual leave, public holidays, sick days and the weeks around Christmas when work is quiet. Then take off the hours each week that nobody pays for: quoting, travelling between jobs if you do not charge it, picking up materials, chasing invoices and paperwork.

The honest way to find your number is to look back. Count the hours you actually invoiced last year, or keep a simple log for a month of which hours were billed and which were not. Your billable hours are your own; no average will tell you.

Step 4: the sum

Add what you need to earn to what the business costs, and divide by your billable hours. That is what each billed hour costs you. Then add a markup for profit, so the business has money for a slow month, a broken-down ute or the next van.

Markup and margin are not the same. A 15% markup on cost is about a 13% margin on the price. If your accountant talks in margin, divide your cost by (1 minus the margin) instead: $94.98 / 0.85 is about $111.74.

Check the rate against real jobs

A rate is only right if jobs make money at it. Once you have a few weeks of jobs at the new rate, compare what each job was quoted or invoiced with the hours and materials it really took. Jobs that keep running over tell you either the rate or the estimates are off.

In Crewzy the Profit by job report does this for you, using the time your crew clock and the costs from supplier bills, and flags any job with unpriced work so the figure is honest.

When to raise it

Look at the rate at least once a year, and whenever a big cost changes: a new vehicle, an insurance renewal or a new employee. Tell regular customers before the new rate applies, and put the new rate on your next quote to them so it is agreed in writing before the first invoice.

Putting it to work

Put your rate on your price list as a labour item, with a call-out fee and any after-hours rate beside it. In Crewzy, every new business starts with a starter price list for its trade with each item marked as a starter price, and checking your labour rate is one of the setup steps, because a starter rate is only a guess. Quotes and job invoices then price from your own rates.

Related

• Call-out fees: how to set and explain them
• How to quote a job as a tradie
• Profit by job in the app
• All guides