Most tradespeople who start out on their own pick an hourly rate by looking at what others charge, or by adding a bit to what they earned as an employee. Both are risky. Your charge-out rate has to pay you, cover every cost of running the business and leave a profit, all from the hours you can actually bill. This guide walks through a simple way to work it out.
Why your old wage is the wrong starting point
As an employee, someone else paid for the van, the tools, the insurance, the phone, the accounting, your holidays and your sick days. They also found the work and absorbed the quiet weeks. Now that’s all on you. A rate that only replaces your old hourly wage will leave you working full time and going backwards.
Step 1: Decide what you need to pay yourself
Start with the yearly income you want to take home before tax, as if you were paying yourself a salary. Be realistic: it should be at least what you’d earn working for someone else, because you’re also carrying the risk.
Step 2: Add up your yearly running costs
List everything the business spends in a year, whether or not you’re working on a job that day:
- Vehicle: finance or depreciation, fuel, servicing, insurance, registration
- Tools and equipment: replacement, repairs, hire
- Insurance: public liability, tools, income protection
- Phone, internet and software
- Accounting, bank fees and memberships or licences
- Workwear, safety gear and consumables you don’t charge to jobs
- Advertising, website and signage
- Training and continuing professional development
Go through last year’s bank statements if you have them. People almost always underestimate this number on the first try.
Step 3: Work out your billable hours
This is where most rates go wrong. A year has about 52 weeks, but you won’t bill 52 weeks of 40 hours. Take off:
- Public holidays and your own annual leave
- Sick days and family days
- Rain days and gaps between jobs
- Time spent quoting, ordering, travelling, invoicing and doing paperwork
A typical small trade business bills somewhere between 60% and 75% of the hours it works. Here’s an example for someone working a 40-hour week:
| Item | Hours |
|---|---|
| 52 weeks × 40 hours | 2,080 |
| Less 4 weeks’ leave and public holidays | −240 |
| Less sick days and rain days | −80 |
| Hours available | 1,760 |
| Billable share (about 70%) | 1,232 |
So in this example, there are only about 1,230 hours a year to recover all your wages, costs and profit.
Step 4: Add a profit margin
Profit isn’t your wage. It’s what the business keeps to replace equipment, ride out slow months, pay for growth and reward you for the risk. A margin of 10% to 20% on top of your costs is common for small trade businesses, but it depends on your trade and market.
Step 5: Put it together
The formula is:
Charge-out rate = (your wage + running costs) × (1 + profit margin) ÷ billable hours
A worked example with round numbers:
| Item | Amount |
|---|---|
| Wage you want to pay yourself | $75,000 |
| Yearly running costs | $30,000 |
| Subtotal | $105,000 |
| Plus 15% profit | $120,750 |
| ÷ 1,232 billable hours | about $98 an hour |
That figure is before sales tax. If you’re registered for GST, VAT or sales tax, add it on top for clients, as your country requires.
These numbers are only an example. Your own wage, costs and hours will give a different answer.
Check it against the market
Once you have your number, compare it with what others in your area charge for similar work. If your rate is well above the market, look at your costs and your billable hours before you cut the rate. Can you reduce travel time, quote faster or bill more of the day? If your rate is well below the market, you’ve probably missed some costs, or you have room to charge more.
Labour rate versus job pricing
An hourly rate is useful even if you mostly quote fixed prices. It’s the building block for estimating labour on every quote. To price a job, estimate the hours, multiply by your rate, add materials with a markup, and allow for anything unusual. Our guide on how to price a bathroom renovation shows this in practice.
When you have staff
If you employ people, work out a separate charge-out rate for each person. Their cost is more than their hourly wage: add holiday pay, sick leave, employer contributions such as retirement savings or payroll taxes, ACC levies or workers’ compensation, training, uniforms and any vehicle or tools you supply. Then divide by their billable hours, not their paid hours.
Review your rate every year
Costs go up every year: fuel, insurance, materials and software. Put a date in your calendar to rework your rate once a year, and give regular clients notice before it changes. Small, regular increases are easier for clients to accept than a big jump after years of standing still.
Quick checklist
- Pay yourself at least a market wage
- Count every yearly running cost, not just the obvious ones
- Use billable hours, not total hours worked
- Add a profit margin on top
- Add sales tax for clients where it applies
- Compare with your local market
- Review the rate every year
Tracking actual hours against quoted hours on every job shows you quickly whether your rate is working. TradeFlow records time and costs against each job and shows the real profit, so you can see which jobs pay and which don’t.
This guide is general information, not financial or tax advice. Tax rules and employer obligations differ by country, so check with an accountant or your tax authority for your own situation.