Contractor labor pricing

Calculate a labor rate that recovers payroll and overhead.

A sustainable billable rate has to recover loaded labor, non-billable time and operating overhead before it produces profit.

Start with loaded labor cost

Base wages are only the first layer. Employer payroll taxes, workers compensation, benefits and other wage-linked costs increase the amount the business pays for each paid hour.

Use billable hours, not every paid hour

Travel, estimating, purchasing, training, administration and callbacks can be necessary without being billed directly. If a worker is paid for 2,080 hours and 70% are billable, the business has 1,456 billable hours available to recover that worker's annual labor cost.

Convert annual overhead into an hourly recovery amount

Vehicles, insurance, licensing, tools, facilities, software, marketing and administration still have to be paid. Divide annual overhead by realistic team billable hours so each sold hour carries its share.

Calculate the selling rate from margin

Add labor cost per billable hour and overhead recovery to find the break-even rate. Divide that cost by one minus the target margin to find the selling rate.

A 25% margin is not the same as a 25% markup. If the break-even rate is $75, a 25% target margin requires a $100 selling rate.

Check the utilization sensitivity

Lower utilization spreads the same annual labor and overhead across fewer sellable hours. That is why a rate that works at 80% utilization can lose money when the business consistently achieves only 60%.

This article and workbook are planning aids. Confirm payroll, tax, insurance, accounting and legal treatment with qualified professionals.