Labor pricing
How much should a contractor charge for labor?
The labor rate billed to a customer must cover more than hourly pay. Start with the business's full labor cost, then account for billable time, overhead and profit.
Separate pay from labor cost
Hourly pay is what the worker receives before deductions. Labor cost may also include employer payroll taxes, workers' compensation, unemployment insurance, benefits and paid non-working time. A labor burden percentage is one practical way to keep those costs visible in an estimate.
If base labor costs $28 per hour and the burden is 15%, the burdened labor cost is $32.20 per hour. This is still not automatically the customer rate.
Not every paid hour is billable
Travel, estimating, purchasing, callbacks, training and administration consume time. If the business pays for 40 hours but can bill only 30, the billable labor rate must recover the cost of all 40 hours across those 30 billable hours.
Use your own recent records rather than a generic utilization percentage. Seasonal work and different service types can produce very different billable patterns.
Decide where overhead belongs
You can include overhead in the labor rate, allocate it by job or use a consistent combination. Avoid recovering the same overhead twice. The method matters less than applying it consistently and checking that total job revenue covers total operating expense.
Add profit after cost
Once labor and overhead cost are covered, use the target profit margin to calculate a selling price. Do not treat the difference between hourly pay and the customer rate as pure profit. Much of that difference may be recovering burden, non-billable time and overhead.
Check the rate against actual jobs
Compare estimated hours with actual hours by service type. If a task repeatedly runs 20% over, fix the production assumption or scope, not just the rate. A good labor rate cannot rescue an estimate that consistently omits time.
Labor, insurance and tax costs vary by location and business. Use current records and qualified professional guidance where appropriate.